Text For Partnership

PAT – SBCA SOL 2ND SEM SY 2015-2016
ATTY. BATUNGBAKAL
PARTNERSHIP TITLE IX
1ST ASSIGMENT: ARTICLES 1767 – 1783 [NCC]
Art. 1767. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry
to a common fund,
with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the
exercise of a profession.
•
Partnership’ Defined - It is a contract whereby two

or more persons bind themselves to contribute money,
property, or industry
to a common fund, with the intention of dividing the
profits among themselves, or in order to exercise a
profession. (See Art.
1767). It is also a status and a fiduciary relation
subsisting between persons carrying on a business in
common with a view on
profit.
Characteristics of the Contract
(a) The contract is consensual, because it is perfected by

mere consent, although such consent must be manifested in
certain cases by
the proper formalities; bilateral or multi-lateral, because
it is entered into between two or more persons;
nominate, because it is
designated by a specific name; principal, because its existence
does not depend on the life of another contract;
onerous, because
certain contributions have to be made; and preparatory, in
the sense that after it has been entered into, other contracts
essential
in the carrying out of its purposes can be entered into.
(See 4 Sanchez Roman 519).
(b) There must be a contribution of money, property or

industry to a common fund (credit, such as that
evidenced by a promissory
note, or even mere goodwill — economic goodwill or commercial
credit, which is the sheer ability to obtain funds on
credit —
may be contributed for both credit and goodwill are considered
properties — but not mere “political credit” or personal
influence, since this may be contrary to good customs)
(c) The object must be a lawful one. (Art. 1770, Civil Code).
(d) There must be an intention of dividing the profit among
the partners (Art. 1767) since the firm is for the common
benefit or
interest of the partners. (Art. 1770, Civil Code).
NOTE: The object must be for profit and not merely
for common enjoyment; otherwise, only a co-ownership has
been formed.
However, pecuniary profit need not be the only aim; it is
enough that it is the principal purpose. Thus, other ends
— like social, moral,
or spiritual objectives — may also properly exist
(e) There must be the affectio societatis — the desire to
formulate an ACTIVE union (Fernandez v. De la Rosa, 1
Phil. 671) with
people among whom there exist mutual confidence and trust (delectus
personarum).
‘Partnership’ Distinguished from a ‘Corporation’
DISTINGUISHING FACTOR
PARTNERSHIP
CORPORATIONS
(a) HOW CREATED
(b) HOW LONG IT EXISTS
(c) LIABILITY TO
STRANGERS
(d) TRANSFERABILITY
OF INTEREST
(e) ABILITYTO BIND

THE FIRM
(a) VOLUNTARY agreement of

parties
(a) created by the state in the form of

a special charter or by a general
enabling law (The Corporation Code)
(b) not more than 50 years; (Sec. 11,

Corp. Code), may be reduced, but
never extended
(c) liable only for payment of their

subscribed capital stock
(b) no time limit except agreement
of parties
(c) may be liable with their private

property beyond their contribution to
the firm
(d) even if a partner transfers his

interest to another, the transferee
does not become a partner unless all
other partners consent (This is due to
the principle of mutual trust and
confidence - the “delectus
personarum.”)
(d) a transfer of interest makes the

transferee a stockholder, even without
the consent of the others
(e) generally, the stockholders cannot

bind corporation since they are not
agents thereof
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(f) MISMANAGEMENT
(g) NATIONALITY
(e) generally, partners acting on

behalf of the partnership are agents
thereof; consequently they can bind
both the firm and the partners
(f) a partner can sue a partner who

mismanages
(g) a partnership is a national of the

country it was created
(h) ATTAINMENT OF
LEGAL PERSONALITY
(i) DISSOLUTION
(h) the firm becomes a juridical

person from the time the contracts
begins
(i) death, retirement, insolvency, civil
interdiction, or insanity of a partner
dissolves the firm
(f) A stockholder cannot sue a

member of the board of directors who
mis-manages: the action must be in
the name of the corporation
(g) a corporation is a national of the

country under whose laws it was
incorporated, except for wartime
purposes or for the acquisition of land,
natural resources and the operation of
public utilities in the Philip- pines, in
which case the veil of corporate
identity is pierced and we go to the
nationality of the controlling
stockholders
(h) the firm becomes a juridical

person from the time it is registered in
the Securities and Exchange Com-
mission, and all requisites have been
complied with
(i) such causes do not dissolve a
corporation
‘Ordinary Partnership’ Distinguished from the ‘Conjugal Partnership

of Gains’
FACTORS
ORDINARY PARTNERSHIP
CONJUGAL PARTNERSHIP
(a) HOW CREATED
(a) by will or consent of the parties (a)
created by operation of law
upon the celebration of the
marriage
(b) LAW THAT
(b) in general, it is the will of the
GOVERNS
partners that governs matters like
(b) in general, it is the law that
object, length of existence, etc.; the

governs
law is only subsidiary
(c) LEGAL
(c) possesses a legal personality
PERSONALITY
(Art. 1768, Civil Code)
(c) does not possess any legal
personality distinct from that of
the husband or wife; hence, it
(d) begins from the moment of the cannot sue or

be sued as such
(d) COMMENCEMENT
execution of the contract but a
OF THE PARTNERSHIP contrary stipulation is allowed (Art.
(d) commences precisely on
1784, Civil Code)

the date of the celebration of
the marriage — no contrary
(e) formed for profit

stipulation is allowed
(e) PURPOSE
(f) as a rule, profits are divided ac-

(f) DIVISIONOF
cording to previous agreement; and (e) not formed
particularly for
PROFITS
if there is no agreement, in
profit
proportion to the amount
contributed (Art. 1797, Civil Code)

(f) as a rule, profits are
divided equally (but settlement
(g) as a rule, management is

can provide otherwise) (Art.
(g) MANAGEMENT
conferred upon the partners so
106, Family Code)
appointed by the others; other-
wise, all are equally considered
agents of the firm (Art. 1803, Civil

(g) as a rule, the administration
Code)
and enjoyment of the conjugal
partnership property belong to

(h) DISSOLUTION
(h) there are many grounds for dis- both spouses jointly
(Art. 124,
solution
Family Code)
(i) LIQUIDATION OF
(i) there may be division of profits
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PROFITS
even without dissolution
(h) there are few grounds for

dissolution
(i) there will be no liquidation

or giving of profits till after
dissolution
‘Partnership’ Distinguished from ‘Co-ownership’ (Community of

Property; Tenancy in Common)
FACTORS
PARTNERSHIP
CO-OWNERSHIP
(a) CREATION
(a) created by contract only (express (a) created
by contract, law and other
or implied)
things
(b) JURIDICAL
(b) has legal or juridical personality (b) has no
juridical personality (hence,
it cannot sue or be sued as such)
(c) PURPOSE
(c) for profit
(c) collective enjoyment (hence, not
necessarily for profit)

(d) AGENCY OR
(d) as a rule, there is no mutual
REPRESENTATION
representation
(d) as a rule, there is no mutual
representation (although it is enough
for one co-owner to bring an action for

(e) TRANSFER OF
(e) cannot substitute another as
ejectment against a stranger) (Art. 487,
INTEREST
partner in his place, without
Civil Code)
unanimous consent
(f) LENGTH OF
(e) can dispose of his share without

EXISTENCE IF
(f) no term limit is set by the law
the consent of the others
CREATED BY
CONTRACT
(f) must not be for more than 10 years
(although agreement after termination
may be renewed) (hence, if more than
10 years, the excess is VOID)

(g) PROFITS
(g) may be stipulated upon
(NOTE: 20 years is the maximum if
imposed by the testator or donee of the
common property.)
(h) DISSOLUTION
(h) dissolved by death or incapacity
of a partner
(g) profits must always depend on
proportionate shares (any stipulation

(i) FORM
(i) may be made in any form except
to the contrary is VOID) (Art. 485)
when real property is contributed
(Here, a public instrument is

(h) not dissolved by the death or
required.)
incapacity of co- owner
(i) no public instrument needed even if

real property is the object of the coownership
•
Capacity to Become Partner
(a) In general, a person capacitated to enter into
contractual relations may become a partner. (40 Am. Jur.
140).
(b) An unemancipated minor cannot become a partner
unless his parent or guardian consents. Without such
consent, the
partnership contract is voidable, unless other partners are in
the same situation, in which case the contract is
unenforceable. (Arts.
1327, 1403, and 1407, Civil Code).
(c) A married woman,even if alreadyofage, cannot contribute
conjugal funds as her contribution to the partnership,
unless she is
permitted to do so by her husband (See Art. 125, Family
Code), or unless she is the administrator of the
conjugal partnership, in which
latter case, the court must give its consent/authority. (See Art.
124, Family Code).
(d) A partnership being a juridical person by itself
can, it is believed, form another partnership, either
with private individuals or with
other partnerships, there being no prohibition on the matter.
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(e) The majority view is that a corporation cannot become

a partner on grounds of public policy; otherwise,
people other than its
officers may be able to bind it.
Art. 1768. The partnership has a juridical personality separate and
distinct from that of each of the partners, even in case
of failure to comply
with the requirements of Article 1772, first paragraph.
Consequences of the Partnership Being a Juridical Entity

(a) Its juridical personality is SEPARATE and DISTINCT from
that of each of the partners. (Thus, in the partnership
“Sundiang and Castillo,”
there are three persons: Sundiang, Castillo, and the firm “Sundiang
and Castillo”.)
(b) The partnership can, in general:
1) acquire and possess property of all kinds (Art. 46,
Civil Code);
2) incur obligations (Art. 46, Civil Code);
3) bring civil or criminal actions (Art. 46, Civil Code);
4) can be adjudged INSOLVENT even if the individual
members be each financially solvent.
(c) Unless he is personally sued, a partner has no right
to make a separate appearance in court, if the
partnership being sued is already
represented.
Rules in Case of Associations Not Lawfully Organized as

Partnerships
(a) If an association is not lawfully organized as a
partnership (though it apparently carries on the business
as a partnership), it possesses
no legal personality. Therefore, it cannot sue as such.
Art. 1769. In determining whether a partnership exists, these rules

shall apply:
(1) Except as provided by Article 1825, persons who are
not partners as to each other are not partners as to
third persons;
(2) Co-ownership or co-possession does not itself establish
a partnership, whether such co-owners or co-possessors
do or do not share any
profits made by the use of the property;
(3) The sharing of gross returns does not of itself
establish a partnership, whether or not the persons
sharing them have a joint or common
right or interest in any property from which the returns are
derived;
(4) The receipt by a person of a share of the
profits of a business is prima facie evidence that he
is a partner in the business, but no such
inference shall be drawn if such profits were received in
payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a
deceased partner;
(d) As interest on a loan, though the amount of
payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of
a business or other property by installments or
otherwise.
Purpose of Art. 1769 (Rules for Determining Existence of

Partnerships) - To indicate some tests to determine if
what may seem to be
a partnership really is one, or it is not.
Requisites for Existence of Partnership
In general, to show the existence of a partnership, all
of its essential characteristics must be proved; in
particular it must be proved that:
(a) there was an intention to create a partnership
(b) there was a common fund obtained from contributions
(c) there was a joint interest in the profits. (See Fernandez
v. De la Rosa, 1 Phil. 669)
THEREFORE:
(a) mere co-ownership or co-possession (even with profit-
sharing)
(b) mere sharing of GROSS returns (even with joint ownership of
the properties involved) do not establish a partnership.
Sharing of Net Profits - Sharing of NET profits is
prima facie evidence that one is a partner except in
the five instances enumerated under
Art. 1769
Proof Needed to Establish the Existence of a Partnership -
No definite criterion can be set up except that all
the characteristics of the
contract must be proved as being present.
Partnership by Estoppel - If two persons not partners
represent themselves as partners to strangers, a partnership
by estoppel results.
Simi- larly when 2 persons, who are partners, in connivance with
a friend (who is not a partner), inform a
stranger that said friend is their
partner, a partnership by estoppel may also result to the
end that the stranger should not be prejudiced. (See Art.
1769 [No. 1] and Art.
1825, Civil Code)
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Art. 1770. A partnership must have a lawful object or

purpose, and must be established for the common benefit
or interest of the partners.
When an unlawful partnership is dissolved by a judicial
decree, the profits shall be confiscated in favor of the
State, without prejudice to the
provisions of the Penal Code governing the confiscation of the
instruments and effects of a crime.
Lawful Object or Purpose - The object or purpose

must be LAWFUL, i.e., it must be within the commerce
of man, possible, and not contrary
to law, morals, good customs, public order or public policy
(See also Arts. 1347 and 1348, Civil Code). Otherwise, the
partnership contract is
VOID AB INITIO. (Art. 1409, Civil Code).
NOTE: If a partnership has several purposes, one of which is
unlawful, the partnership can still validly exist so long as
the illegal
purpose can be separated from the legal purposes
Instances When a Partnership Is Unlawful
(a) A partnership formed to furnish apartment houses
which would be used for prostitution.
(b) A partnership formed tocreate illegal monopolies or
combinations in restraint of trade. (See Art. 186, Rev.
Penal Code).
(c) A partnership for gambling purposes.
(d) A partnership formed for the purpose of acquiring
parcels of land much in excess of the maximum
allowed by the Friar Lands Act.
Consequences of Unlawful Partnership

(a) If the firm is also guilty of a crime, the
Revised Penal Code governs both the criminal liability and
the “forfei- ture of the proceeds of
the crime and the instruments or tools with which it was committed.
Such proceeds and instruments or tools shall be confiscated and
forfeited in favor of the Government, unless they be the
property of a third person not liable for the
offense, but those articles which
are not subject of lawful commerce shall be destroyed.” (Art.
45, Rev. Penal Code).
(b) The partners forfeit the proceeds or profits, but
NOT their contributions, provided no criminal prosecution has
been instituted.
(Arbes v. Polistico, 53 Phil. 489). If the contributions have
already been made, they can be RETURNED; if the
contributions have not yet
been made, the partners cannot be made to make the
contribution. (See 1 Manresa 279).
(c) An unlawful partnership has no legal personality.
Art. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed
thereto, in which
case a public instrument shall be necessary.
Formalities Needed
(a) For VALIDITY of the contract (among the parties) as
well as for ENFORCEABILITY, NO FORM is required as a
general rule, regardless of
the value of the contributions. Therefore, the contract may even
be ORAL.
(Note that a partnership contract is not one of those covered
by the Statute of Frauds.)
Exception: Whenever real properties or real rights in real
properties are contributed - regardless of the value - a
PUBLIC
INSTRUMENT is needed. (The contract itself must be in the
public instrument; moreover, there must be an INVENTORY of
the
immovables. This INVENTORY must be signed by the parties and
attached to the public instrument.) (See Art. 1773, Civil
Code).
[NOTE: Without the public instrument, the partnership is VOID.
(Art. 1773, Civil Code).]
[NOTE: The inventory is important to show how much is due
from each partner to complete his share in the common
fund and
how much is due to each of them in the event of liquidation.
Without such inventory, the contract is void. (11 Manresa
278-279
and Art. 1773)].
(NOTE: The rules for limited partnerships are different.)
(b) For EFFECTIVITY of the partnership contract insofar as
innocent third persons are concerned, the same must be
REGISTERED if REAL
PROPERTIES are involved.
Art. 1772. Every contract of partnership having a capital of
three thousand pesos or more, money or property, shall appear
in a public
instrument, which must be recorded in the Office of the
Securities and Exchange Commission.
Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of the partnership
and the members thereof to
third persons.
Purpose of the Registration with the Office of the
Securities and Exchange Commission - The registration is
to set “a condition for the
issuance of licenses to engage in business or trade.
In this way, the tax liabilities of big partnerships cannot
be evaded, and the public can
also determine more accurately their membership and capital before
dealing with them.”
Effect of Non-Registration
(a) Even if not registered, the partnership having a
capital of P3,000 or more is still a valid one, and
therefore has legal personality. (Art.
1768, Civil Code). (NOTE: Of course if real properties
had been contributed, regardless of value, a public
instrument is needed for the
attainment of legal personality.)
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(b) If registration is needed or desired, any of

the partners of a valid partnership can compel the others
to execute the needed public
instrument, and to subsequently cause its registration. (Art. 1357,
Civil Code). [NOTE: This right cannot be availed
of if the partnership is
void. (Art. 1356 and Art. 1357, Civil Code).]
Art. 1773. A contract of partnership is void, whenever immovable
property is contributed thereto, if an inventory of said
property is not made,
signed by the parties, and attached to the public
instrument.
Requirements Where Immovable Property is Contributed

(a) There must be a public instrument regarding the
partnership. (See Art. 1773).
(b) The inventory of the realty must be made, signed
by the parties, and attached to the public instrument.
(Art. 1773).
Applicability of the Article
(a) Art. 1773 applies regardless of the value of the real
property.
(b) Art. 1773 applies even if only real rights over real
properties are contributed.
(c) Art. 1773 applies also if, aside from real property, cash
or personal property is contributed. (But here, the
inventory need not include
the personality.)
Registration in the Register of Property - The transfer
of the land to the partnership must be duly recorded in
the Register of Property
to make the transfer effective insofar as third persons are
concerned.
Art. 1774. Any immovable property or an interest therein may
be acquired in the partnership name. Title so acquired can
be conveyed only in
the partnership name.
Acquisition of Property Under the Partnership Name Though the
Article speaks only of immovable, same can apply also to
personality
because the partnership is a juridical entity, capable of
owning and possessing property. (Art. 46).
Alien Partners If the partnership has aliens, it cannot
own lands, whether public or private, or whether
agricultural or commercial, except
thru hereditary succession (by the partners who in turn convey
the same to the partnership) or when 60% of the
capital is owned by Filipinos
(or Americans during the duration of the Parity Amendment)
Limitations on Acquisition - A partnership, even if entirely

of Filipino capital may not:
(a) acquire, lease, or hold public agricultural lands in
excess of 1,024 hectares.
(b) lease public lands adapted to grazing in excess of
2,000 hectares.
Art. 1775. Associations and societies, whose articles are kept secret
among the members, and wherein any one of the members
may contract
in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions
relating to co-ownership.
If Articles Are Kept Secret
(a) The association here is certainly not a partnership and
therefore not a legal person, because “anyone of the
members may contract
in his own name with third persons” and not in the name of
the firm.
(b) Although not a juridical entity, it may be sued
by third persons under the “common name” it uses; otherwise,
said innocent third
parties may be prejudiced. (Rule 3, Sec. 15, Rules of Court).
(c) However, it cannot sue as such, because it has
no legal personality and, therefore, cannot ordinarily be a
party to a civil action. (Rule
3, Sec. 1, Rules of Court). Moreover, the fact that it has
no legal personality as a partnership cannot be invoked
by the “partners” for the
purpose of evading compliance with obligations contracted by them,
because they who caused the nullity of a contract
are prohibited
from availing of its benefits.
Therefore, insofar as innocent third parties are concerned, the
partners can be considered as members of a partnership;
but as between
themselves, or insofar as third persons are prejudiced, only the
rules on co-ownership must apply. (See Art. 1775). The
same rule applies
in the case of a partnership by estoppel. (See Art. 1825, Civil
Code).
Effect of Certain Transactions - Thus, contracts entered
into by a “partner” in his own name may be sued upon
still by him in his
individual capacity, notwithstanding the absence of a partnership.
Art. 1776. As to its object, a partnership is either

universal or particular.
As regards the liability of the partners, a partnership may
be general or limited.
Classification of Partnerships
(a) According to manner of creation:
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1) orally constituted
2) constituted in a private instrument
3) constituted in a public instrument
4) registered in the Office of the Securities and Ex- change
Commission
(b) According to object:

1) universal
a) with all present property
b) with all profits
(the individual properties here continue to be owned by the
partners, but the usufruct thereof passes to the firm)
2) particular
here the object are determinate things, their use or fruits;
a specific undertaking, or the exercise of a
profession or occupation (Art. 1783,
Civil Code).
(c) According to liability:
1) limited partnership — that where at least one partner
is a general partner, and the rest are limited
partners.
(NOTE: A general partner is liable beyond his
contribution; a limited partner is liable only to
the extent of his contribution.)
2) general partnership — that where all the partners are
general partners.
(d) According to legality:
1) lawful or legal
2) illegal or unlawful
(e) According to duration:
1) for a specific period or till the purpose is
accomplished
2) partnership at will
a) here, no period, express or implied, is given and

so its duration depends on the will of the partners;
b) if the period has expired, but the partnership
continued, without liquidation, by the partners who
habitually acted as such
during the term. (Art. 1785, Civil Code).
(f) According to representation to others:

1) ordinary partnership
2) partnership by estoppel
Classification Into General and Limited
(a) A general partnership is one where all the partners
are general partners (that is, they are liable even with
respect to their
individual properties, after the assets of the partnership have been
exhausted).
(b) A limited partnership is one where at least one
partner is a general partner and the others are
limited partners. (A limited partner
is one whose liability is limited only up to the extent
of his contribution.) (NOTE: A partnership where all
the partners are “limited
partners” cannot exist as a limited partnership; it will
even be refused registration. If at all it continues,
it will be a general partnership,
and all the partners will be general partners.)
Formalities Needed for the Creation of a Partnership

(a) Personal property
1) less than P3,000 (total) — may be oral
2) P3,000 or more — must be in a public
instrument and registered in the Securities and Exchange Com-
mission. But even if this
is not complied with, the partnership is still valid and possesses
a distinct personality. (Arts. 1772, 1768, Civil Code).
Evidently, the
requirement is merely for administrative and licensing purposes.
(b) Real property — Regardless of the value contributed,
a public instrument is needed, with an attached
inventory; otherwise the
partnership is VOID and has NO juridical personality even as
between the parties. (Art. 1773, Civil Code). Moreover, to
be effective against
third parties, the partnership must also be registered in the
Registry of Property of the province where the real
property contributed is
found. After all, there is an alienation here of a real right
on real property.
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(c) Limited partnership — must be registered AS SUCH in

the Office of the Securities and Exchange Commission;
otherwise, it is not valid as
a limited partnership.
(NOTE: However, even without such registration, it may still
be considered a general partnership, and as such,
possesses juridical
personality). (See Arts. 1843, 1844, Civil Code).
Art. 1777. A universal partnership may refer to all the present
property or to all the profits.
Kinds of Universal Partnerships
(a) Partnership of all present property
(b) Partnership of all profits
Art. 1778. A partnership of all present property is that in

which the partners contribute all the property which actually
belongs to them to a
common fund, with the intention of dividing the same among
themselves, as well as all the profits which they may
acquire therewith.
Definition of Universal Partnership of All Present Property
The contribution here consists of:
(a) All the properties actually belonging to the partners
(b) The profits acquired with said properties.
Art. 1779. In a universal partnership of all present property,
the property which belonged to each of the partners at
the time of the
constitution of the partnership, becomes the common
property of all the partners, as well as all the
profits which they may acquire therewith.
A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may
acquire subsequently
by inheritance, legacy, or donation cannot be included
in such stipulation, except the fruits thereof.
Art. 1780. A universal partnership of profits comprises all that
the partners may acquire by their industry or work during
the existence of the
partnership.
Movable or immovable property which each of the partners may
possess at the time of the celebration of the contract
shall continue to pertain
exclusively to each, only the usufruct passing to the partnership.
Universal Partnership of Profits - The Article speaks of
the universal partnership of profits.
(NOTE: This Article and the three preceding ones speak of the
two kinds of universal partnership.)
Distinctions
ALL PROFITS
(a) Only the USUFRUCT of the properties of the
partners becomes COM- MON PROPERTY
(owned by them and the partnership); NAKED
OWNER- SHIP is retained by each of the
partners.
(b) ALL PROFITS acquired by the INDUSTRY or

WORK of the partners become COMMON
PROPERTY (regardless of whether or not said
profits were obtained through the usufruct
contributed).
ALL PRESENT PROPERTY

(a) All the property actually belonging to the
partners are CONTRIBUTED — and said properties
become COMMON PROP- ERTY (owned by all the
partners and by the partnership).
(b) As a rule, aside from the contributed

properties, only the PROFITS of said contributed
COMMON PROPERTY (not other profits).
(NOTE: Profits from other sources may become

COMMON, but only if there is a stipulation to such
effect.)
Properties subsequently acquired by inheritance,

legacy, or donation, cannot be included in the
stipulation, BUT the fruits thereof can be included
in the stipulation.)
Future Property - Reasons why future (by inheritance,

legacy, donation) property cannot be included in the
stipulation regarding the
universal partnership of all present property:
(a) First, as a rule, contracts regarding successional
rights cannot be made.
(b) Secondly, a partnership demands that the contributed things
be determinate, known, and certain.
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(c) Thirdly, a universal partnership of all present

properties really implies a donation, and it is
well-known that generally, future
property cannot be donated.
Art. 1781. Articles of universal partnership, entered into
without specification of its nature, only constitute a
universal partnership of profits.
Presumption in Favor of Partnership of Profits
(a) The Article applies only when a universal partnership
has been entered into.
(b) Reason for the Article. Less obligation is imposed
in the universal partnership of profits because their real
and personal properties
are retained by them in naked ownership.
(c) If however a universal partnership of all present
properties is desired, REFORMATION is the proper remedy
Art. 1782. Persons who are prohibited from giving each other any
donation or advantage cannot enter into universal partnership.
Persons Who Together Cannot Form a Universal Partnership -
Examples of people prohibited:
(a) Husband and wife — as a rule. (Art. 133, Civil
Code).
(b) Those guilty of adultery or concubinage. (Art. 739,
Civil Code).
(c) Those guilty of the same criminal offense, if the
partnership was entered into in consideration of the same.
(Art. 739, Civil Code).
Reason for the Article - A universal partnership is

virtually a donation to each other of the partner’s
properties (or at least, their
usufruct). Therefore, if persons are prohibited to donate to
each other, they should not be allowed to do
indirectly what the law forbids
directly.
Effect of Violation The partnership violating Art. 1782 is

null and void, and its nullity may be raised anytime.
No legal personality was
ever acquired
Art. 1783. A particular partnership has for its object determinate

things, their use or fruits, or specific undertaking,
or the exercise of a
profession or vocation.
‘Particular Partnership’ Defined - The Article defines a

“particular” partnership.
(NOTE: A husband and his wife may enter into a particular
partnership.)
Doctrine - If two individuals form a particular partnership for

a deal in realty, it does not necessarily follow that
all deals are for the
benefit of the partnership. In the absence of agreement,
each particular deal results in a particular partnership.
If one of them, on his own
account, and using his own funds, should make transactions
in the same business, it is his own undertaking
Chapter 2 OBLIGATIONS OF THE PARTNERS

Section 1 : OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES
Different Relationships - When two persons, A and B, form

a partnership, different relations may arise:
(a) Relations between A and B;
(b) Relations between A and B on the one hand, and
the partnership on the other hand;
(c) Relations between A and B on the one hand, and
third persons on the other hand;
(d) Relations between the partnership and the third persons.
Some Obligations of a Partner

(a) To give his contribution. (Arts. 1786, 1788, Civil Code).
(b) Not to convert firm money or property for his own

use. (Art. 1788, Civil Code).
(c) Not to engage in unfair competition with his own
firm. (Art. 1808, Civil Code).
(d) To account for and hold as trustee, unauthorized
personal profits. (Art. 1807, Civil Code).
(e) Pay for damages caused by his fault. (Art. 1794,
Civil Code).
(f) Duty to credit to the firm, payment made by a
debtor who owes him and the firm. (Art. 1792, Civil Code).
(g) To share with the other partners the share of the partnership
credit which he has received from an insolvent firm
debtor. (Art.
1743, Civil Code).
Some Rights of a Partner

(a) property rights. (Art. 1810, Civil Code).
1) rights in specific partnership property (example
—rights in a car contributed to the firm).
2) interest in the partnership (share in the profits
and surplus). (Art. 1812, Civil Code).
3) right to participate in the management. (Art. 1810, Civil
Code).
[NOTE: This right is not given to the limited partner.
(Art. 1848, Civil Code).]
(b) right to associate with another person in his share.
(Art. 1804, Civil Code).
(c) right to inspect and copy partnership books. (Art. 1805,
Civil Code).
(d) right to demand a formal account. (Art. 1809, Civil
Code).
(e) right to ask for the dissolution of the firm at the
proper time. (Arts. 1830-1831, Civil Code).
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Art. 1784. A partnership begins from the moment of the

execution of the contract, unless it is otherwise
stipulated.
When a Partnership Begins

(a) Generally, from the moment of the execution of the
contract.
(b) Exception — When there is a contrary stipulation.
Intent to Create a Future Partnership - The Article

presupposes that there can be a future partnership which at
the moment has no
juridical existence yet.
The agreement for a future partnership does not of itself
result in a partnership. The intent must later on
be actualized by the formation of
the intended partnership.
Rule if Contributions Have Not Yet Been Actually Made -

Generally, even if contributions have not yet been made, the
firm already
exists, for partnership is a consensual contract (of course
all the requisite formalities for such consent must be
present).
Art. 1785. When a partnership for a fixed term or particular

undertaking is continued after the termination of such term or
particular
undertaking without any express agreement, the rights and duties
of the partners remain the same as they were at such
termination, so far as
is consistent with a partnership at will.
A continuation of the business by the partners or such

of them as habitually acted therein during the term,
without any settlement or
liquidation of the partnership affairs, is prima facie evidence of
a continuation of the partnership.
Duration of a Partnership : A partnership is unlimited as

to its duration in the sense that no time limit is fixed
by law. The duration may
be agreed upon — expressly (as when there is a definite
period) or impliedly (as when a particular enterprise is
undertaken — it being
understood that the firm ends as soon as its purpose has been
achieved).
Partnership “At Will” - There are two kinds of a partnership “at

will.”
(a) 1st kind — when there is no term, express or
implied
(b) 2nd kind — when it is continued by the habitual
managers — although the period has ended, or the
purpose has been accomplished.
(NOTE: This is “prima facie” evidence of the firm’s
continuation.)
[NOTE: It is called “at will” because its continued
existence really depends upon the will of the partners,
or even on the will of any
of them. (40 Am. Jur., Sec. 19, 139).]
Art. 1786. Every partner is a debtor of the partnership for

whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with

regard to specific and determinate things which he may
have contributed to the
partnership, in the same cases and in the same manner as
the vendor is bound with respect to the vendee. He
shall also be liable for the fruits
thereof from the time they should have been delivered, without
the need of any demand.
Three Important Duties of Every Partner - The Article speaks

of three things:
(a) the duty to contribute what had been promised;
(b) the duty to deliver the fruits of what should
have been delivered; and
(c) the duty to warrant.
The Duty to Contribute

(a) The contribution must be made ordinarily at the time
the partnership is entered into, unless a different period
is stipulated. In
either case, no demand is needed to put the partner
in default, because in a partnership the obligation
to contribute is one where
time is of the essence (for without the contribution, the
partnership is useless).
(b) The partner must exercise due diligence in preserving
the property to be contributed, before he actually
contributes the same;
otherwise, he can be held liable for losses and
deterioration. (See 11 Manresa 344; see also Art. 1794, Civil
Code).
The Duty to Deliver the Fruits

(a) If property has been promised, the fruits thereof
should also be given. The fruits referred to are
those arising from the time they
should have been delivered, without need of any demand. If
the partner is in bad faith, he is liable not
only for the fruits actually
produced, but also for those that could have been produced. (See 11
Manresa 344).
(b) If money has been promised, “interest and damages from
the time he should have complied with his obligation” should
be given.
(Art. 1788). Here again, no demand is needed to put
the partner in default. Query: Who owns the
property before it is delivered?
ANS.: It is submitted that both in the case of money or
property, it is the partner who still owns the same before
delivery, for it is
delivery, actual or constructive, that transfers ownership.
The Duty to Warrant

(a) The warranty in case of eviction refers to
“specific and determinate things” already contributed. (See
Art. 1786, Civil Code).
(b) There is “eviction” whenever by a final judgment based
on a right prior to the sale or an act imputable to
the partner, the
partnership is deprived of the whole or a part of the thing
purchased. The parties may however uppress, increase, or
diminish this
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legal obligation. (See Art. 1548, Civil Code). The partner who made
the contribution should be summoned in the suit for
eviction, at the
instance of the partnership. (Art. 1558, Civil Code).
Art. 1787. When the capital or a part thereof which a

partner is bound to contribute consists of goods, their
appraisal must be made in the
manner prescribed in the contract of partnership, and in
the absence of stipulation, it shall be made by
experts chosen by the partners, and ac-
cording to current prices, the subsequent changes thereof
being for the account of the partnership.
When Contribution Consists of Goods - Appraisal of value is

needed to determine how much has been contributed.
How Appraisal Is Made

(a) Firstly, as prescribed by the contract.
(b) Secondly, in default of the first, by EXPERTS
chosen by the partners, and at CURRENT prices.
Necessity of the Inventory-Appraisal - Proof is needed to

determine how much goods or money had been contributed. An
inventory is
therefore useful.
Risk of Loss - After goods have been contributed, the partnership
bears the risks of subsequent changes in their value. (Art.
1787).
Art. 1788. A partner who has undertaken to contribute a sum

of money and fails to do so becomes a debtor for
the interest and damages from
the time he should have complied with his obligation.
The same rule applies to any amount he may have taken from
the partnership coffers, and his liability stroll begin from
the time he converted
the amount to his own use.
Rules of Failure to Contribute and for Conversion - Cases

covered by the Article:
(a) when money promised is not given on time;
(b) when partnership money is converted to the personal use
of the partner.
Coverage of Liability - Liability covers ALSO interest and

damages:
(a) Interest at the agreed rate; if none, at the legal
rate of 6% per annum.
(b) Damages that may be suffered by the partnership.
Why No Demand Is Needed to Put Partner in Default
(a) In the case of the contribution, because time is
of the essence, a partnership is formed precisely to
make use of the contributions,
and this use should start from its formation, unless a
different period has been set; otherwise the firm is
necessarily deprived of the
benefits thereof. Thus, the injury is constant. (11 Manresa
332-335).
(b) In the case of conversion, because the firm is
deprived of the benefits of the money, from the very
moment of conversion.
[NOTE: Even if no actual injury results, the liability
exists, because the article is absolute.
Art. 1789. An industrial partner cannot engage in business

for himself, unless the partnership expressly permits him
to do so, and if he should
do so, the capitalist partners may either exclude him from
the firm or avail themselves of the benefits which he may
have obtained in violation
of this provision, with a right to damages in either case.
Classification of Partners
Capitalist partner — one who furnishes capital. (He is not
exempted from losses; he can engage in other business
provided there is NO
COMPETITION between the partner and his business.) (See Art. 1808,
Civil Code).
Industrial partner — one who furnishes industry or labor.

[He is exempted from losses as between the partner;
he cannot engage in any
other business without the express consent of the other
partners; otherwise:
1) he can be EXCLUDED from the firm (PLUS DAM- AGES);
2) OR the benefits he obtains from the other businesses
can be availed of by the other partners (PLUS DAMAGES).
(Art. 1789, Civil
Code).]
[NOTE: The rule remains true whether or not there is
COMPETITION. Reason: All his industry is supposed to
be given only to the
partnership. ]
Capitalist-industrial partner — one who contributes both capital

and industry.
General partner — one who is liable beyond the extent

of his contribution.
Limited partner — one who is liable only to the extent

of his contribution.
[NOTE: An industrial partner can only be a general
partner, never a limited partner. (See Art. 1845, Civil
Code).]
Managing partner — one who manages actively the firm’s
affairs.
Silent partner — one who does not participate in the
management (though he shares in the profits or
losses).
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Liquidating partner — one who liquidates or winds up the

affairs of the firm after it has been dissolved.
Ostensible partner — one whose connection with the firm is public
and open (that is, not hidden).
(Usually his name is included in the firm name.)
Secret partner — one whose connection with the firm is

concealed or kept a secret.
Dormant partner — one who is both a secret (hidden)

and silent (not managing) partner.
Nominal partner — one who is not really a partner

but who may become liable as such insofar as third
persons are concerned.
(Example: a partner by estoppel.)
Distinctions Between a ‘Capitalist’ and an ‘Industrial

Partner’
(a) As to contribution:
1) the capitalist partner
contributes money or property
2) the industrial partner
contributes his industry (mental or physical)
(b) As to prohibition to engage in other business:
1) the capitalist partner cannot
generally engage in the same or similar enterprise as
that of his firm
(the test is the possibility of unfair competition). (Art. 1808,
Civil Code).
2) the industrial partner cannot
engage in any business for himself
(Reason: all his industry is supposed to be contributed to
the firm). (Art. 1789, Civil Code).
(c) As to profits:
1) the capitalist partner
shares in the profits according to the agreement
thereon; if none, pro rata to his contribution. (Art.
1797, Civil
Code).
2) the industrial partner
receives a just and equitable share. (Art. 1797, Civil Code).
(d) As to losses:
1) capitalist
a) first, the stipulation as to losses
b) if none, the agreement as to profits
c) if none, pro rata to contribution
2) the industrial partner is exempted as to losses
(as between the partners). But is liable to strangers,
without prejudice to
reimbursement from the capitalist partners. (Art. 1816, Civil Code).
Art. 1790. Unless there is a stipulation to the contrary the

partners shall contribute equal shares to the capital of
the partnership.
Amount of Contribution
(a) It is permissible to contribute unequal shares, if
there is a stipulation to this effect.
(b) In the absence of proof, the shares are
presumed equal.
To Whom Applicable -The rule applies to capitalist partners

apparently; however, the share of the industrial partner is
undoubtedly
also available, for his industry may be worth even more than the
entire capital contributed.
Art. 1791. If there is no agreement to the contrary, in case

of an imminent loss of the business of the partnership,
any partner who refuses to
contribute an additional share to the capital, except an
industrial partner, to save the venture, shall be obliged
to sell his interest to the other
partners.
When a Capitalist Partner Is Obliged to Sell His Inter-

est to the Other Partners
(a) If there is imminent loss of the business of the
partnership;
(b) and he refuses (deliberately and not because of
poverty, otherwise this would be unjust) to contribute an
additional share to the
capital;
(c) and provided further that there is no agreement to
the contrary.
Reason Because of his apparent lack of interest, and

granting that he sincerely believes that efforts to save
the firm would be futile, the
capitalist partner referred to should get out of the firm.
Rule for the Industrial Partners Note that the industrial

partner is exempted. Reason: He is already giving
his entire industry.
Art. 1792. If a partner authorized to manage collects a

demandable sum, which was owed to him in his own name, from
a person who owed
the partnership another sum also demandable, the sum thus collected
shall be applied to the two credits in proportion to
their amounts, even
though he may have given a receipt for his own credit
only, but should he have given it for the account of
the partnership credit, the amount
shall be fully applied to the latter.
The provisions of this article are understood to be without
prejudice to the right granted to the debtor by
Article 1252, but only if the personal
credit of the partner should be more onerous to him.
Rule if Managing Partner Collects a Credit - For this

Article to apply the following requisites must concur:
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(a) The existence of at least 2 debts (one where the firm

is the creditor; 2-where the partner is creditor).
(b) Both sums are demandable.
(c) The collecting partner is a managing partner.
When Article Does Not Apply - Art. 1792 does not apply if the
partner collecting is not a managing partner. Here there
is no basis for the
suspicion that the partner is in BAD FAITH.
Art. 1793. A partner who has received, in whole or in part,

his share of a partnership credit, when the other partners
have not collected theirs,
shall be obliged, if the debtor should thereafter become
insolvent, to bring to the partnership capital what he
received even though he may
have given receipt for his share only.
Art. 1792 Compared With Art. 1793 (Where a Partner Receives

His Share of a Partnership Credit)
Art. 1792
Art. 1793
(a) two debts
(a) one debt only (firm credit)
(b) applies only to managing partner
(b) applies to any partner
Art. 1794. Every partner is responsible to the partnership for
damages suffered by it through his fault, and he
cannot compensate them with
the profits and benefits which he may have earned for the
partnership by his industry. However, the courts may
equitably lessen his
responsibility if through the partner’s extraordinary efforts
in other activities of the partnership, unusual profits
have been realized.
Why General Damages Cannot Be Offset by Benefits

(a) Firstly, the partner has the DUTY to secure
benefits for the partnership; on the other hand, he has
the DUTY also not to be at fault.
(b) Secondly, since both are duties, compensation should
not take place, the partner being the debtor in both
instances. (See 11
Manresa 377). Compensation requires 2 persons who are
reciprocally debtors and creditors of each other.
Mitigation of Liability - Note however that equity may

mitigate liability if there be “extraordinary efforts”
resulting in “unusual profits.”
Need for Liquidation - Before a partner sues another for

alleged fraudulent management and resultant damages, a
liquidation must first
be effected to know the extent of the damage.
Effect of Death of the Negligent Partner - If a

negligent partner is already dead, suit for recovery may
be had against his estate.
Art. 1795. The risk of specific and determinate things, which are
not fungible, contributed to the partnership so that only their
use and fruits
may be for the common benefit, shall be borne by the
partner who owns them.
If the things contributed are fungible, or cannot be kept

without deteriorating, or if they were contributed to be
sold, the risk shall be borne by
the partnership. In the absence of stipulation, the risk
of things brought and appraised in the inventory, shall
also be borne by the partnership,
and in such case the claim shall be limited to the value of
which they were appraised.
Risk of Loss
(a) Specific and determinate things (NOT fungible) — whose
usufruct is enjoyed by a firm — like a car —
partner who owns it bears loss
for ownership was never transferred to the firm.
(b) Fungible or Deteriorable — Firm bears loss for
evidently, ownership was being transferred; otherwise, use is
impossible.
(c) Things Contributed to be Sold — Firm bears loss for
evidently, firm was intended to be the owner; otherwise,
a sale could not be
made.
(d) Contributed under Appraisal — Firm bears loss because this
has the effect of an implied sale
Art. 1796. The partnership shall be responsible to every partner for

the amounts he may have disbursed on behalf of the
partnership and for
the corresponding interest, from the time the expenses are made,
it shall also answer to each partner for the obligations
he may have
contracted in good faith in the interest of the partnership
business, and for risks in consequence of its management.
Responsibility of Firm
(a) To refund amounts disbursed on behalf of firm
plus interest (legal) from the time expenses were made (and
not from demand, since
after all, a partner is an agent, and the rule on agency
applies to him).
[NOTE: Refund must be made even in case of failure of
the enterprise entered into, provided the partner is not
at fault. Reason:
Being a mere agent, the partner should not assume
personal liability. (See Arts. 1897 and 1912). Moreover,
conversion by the
partner results in liability from the moment of conversion.
[NOTE: The “amounts disbursed” referred to in the Article
does not refer to the original capital. ]
[NOTE: A partner who advances funds from his own pocket
for taxes on partnership land, must be reimbursed the same from
partnership assets. If the firm is insolvent, the other partners
must reimburse the paying partner except for the
latter’s
proportionate share in the taxes. ]
(b) To answer to each partner for obligations, he
may have entered into in good faith in the interest of
the partnership, as well as for
RISKS in consequence of its management. (Reason: The partner is
an AGENT.)
Art. 1797. The losses and profits shall be distributed in

conformity with the agreement. If only the share of each
partner in the profits has been
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agreed upon, the share of each in the losses shall be in

the same proportion.
In the absence of stipulation, the share of each partner

in the profits and losses shall be in proportion to
what he may have contributed, but the
industrial partner shall not be liable for the losses. As
for the profits, the industrial partner shall receive such
share as may be just and
equitable under the circumstances. If besides his services he
has contributed capital, he shall also receive a share in
the profits in proportion to
his capital.
How Profits Are Distributed

(a) according to agreement (but not inequitously to
defeat). (Art. 1799).
(b) if none, according to amount of contribution.
How Losses are Distributed
(a) according to agreement — as to losses (but not
inequitously)
(b) if none, according to agreement as to profits
(c) if none, according to amount of contribution.
Industrial Partner’s Profits - A just and equitable share (under
the old law, a share equivalent to that of the capitalist
partner with the
least capital).
Industrial Partner’s Losses - While he may be held liable

by third persons, still he can recover whatever he is
made to give them, from the
other partners, for he is exempted from LOSSES, with or
without stipulation to this effect.
Non-Applicability to Strangers - Art. 1797 applies only to the

partners, not when liability in favor of strangers are
concerned, particularly
with reference to the industrial partner.
Art. 1798. If the partners have agreed to intrust to a

third person the designation of the share of each one in
the profits and losses, such
designation may be impugned only when it is manifestly inequitable.
In no case may a partner who has begun to execute
the decision of the
third person, or who has not impugned the same within a
period of three months from the time he had knowledge
thereof, complain of such
decision.
The designation of losses and profits cannot be intrusted
to one of the partners.
Designation by Third Person of Shares in Profits and Losses
(a) The Article speaks of a “third person,” not
a partner. Reason: To avoid partiality. (11 Manresa 375).
(b) When designation by 3rd party may be impugned — “when
it is MANIFESTLY INEQUITABLE.”
(c) When designation by third party cannot be impugned even
if manifestly inequitable:
1) if the aggrieved partner has already begun to
execute the decision;
2) or if he has not impugned the same within a
period of three months from the time he had knowledge
thereof (not from the time
of making).
Art. 1799. A stipulation which excludes one or more partners from

any share in the profits or losses is void.
Stipulation Excluding a Partner from Profits or Losses

(a) The general rule is that a stipulation excluding one
or more partners from any share in the profits or losses
is void. Reason: The
partnership is for COMMON BENEFIT.
(b) One exception is in the case of the industrial
partner whom the law itself excludes from losses. (Art.
1797, par. 2). If the law itself does
this, a stipulation exempting the industrial partner from losses
is naturally valid. (Of course, it is permissible to
stipulate that even the
industrial partner shall be liable for losses.)
Reason Why Industrial Partner Is Generally Exempted from Losses

- While capitalist partners can withdraw their capital, the
industrial partner cannot withdraw any labor or industry he
had already exerted. Moreover, in a certain sense,
he already has shared in the
losses in that, if the partnership shows no profit, this means
that he has labored in vain.
Art. 1800. The partner who has been appointed manager in the
articles of partnership may execute all acts of
administration despite the
opposition of his partners, unless he should act in bad
faith; and his power is irrevocable without just or lawful
cause. The vote of the partners
representing the controlling interest shall be necessary for such
revocation of power.
A power granted after the partnership has been constituted may be
revoked at any time.
Appointment of Manager - Art. 1800 speaks of two modes of

appointment:
(a) appointment as manager in the articles of partnership;
(b) appointment as manager made in an instrument other than

the articles of partnership or made orally.
Appointment in Articles of Partnership

(a) Power is irrevocable without just or lawful cause.
THEREFORE:
1) to remove him for JUST cause, the controlling
partners (controlling financial interest) should vote to
OUST HIM.
2) to remove him WITHOUT CAUSE, or FOR AN UNJUST
CAUSE, there must be UNANIMITY (including his own vote).
Reason: This represents a change in the will of the
parties: a change in the terms of the contract; a
novation, so to speak, requiring
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unanimity.
(b) Extent of power:

1) if he acts in GOOD faith, he may do all acts
of ADMINISTRATION (not ownership) despite the opposition of
his partners.
2) if in BAD faith, he cannot (however, he is
presumed to be acting in good faith; moreover, if
he really is in bad faith the controlling
interest should remove him.)
Appointment Other Than in the Articles of Partnership

(a) Power to act may be revoked at any time, with or
without just cause.
[Reason: Such appointment is a mere delegation of power,
revocable at any time.]
[NOTE: Of course, removal should also be done by the
controlling interest].
Moreover, the controlling partners should not abuse this right,
otherwise damages are recoverable from them under Arts. 19 &
20.
(b) Extent of power: As long as he remains manager,
he can perform all acts of ADMINISTRATION, but of
course, if the others oppose and
he persists, he can be removed.
Scope of Powers of a Manager - Unless his powers
are specifically restricted, he has the powers of a
general agent, as well as all the
incidental powers needed to carry out the objectives of the
partnership, such as, for example, the power to issue
official receipts, in the
transaction of business; otherwise, this would not be in keeping
with present day business dealings. Indeed, when the object
of a
partnership has been determined, the manager has all the powers
necessary for the attainment of such objective.
Art. 1801. If two or more partners have been intrusted with the
management of the partnership without specification of their
respective
duties, or without a stipulation that one of them shall not
act without the consent of all the others, each one
may separately execute all acts of
administration, but if any of them should oppose the acts
of the others, the decision of the majority shall
prevail. In case of a tie, the matter
shall be decided by the partners owning the controlling
interest.
Rule When There Are Two or More Managers - Art. 1801 applies
when:
(a) two or more partners are managers;
(b) there is NO specification of respective duties;
(c) there is no stipulation requiring unanimity. THEREFORE:
Art. 1801 does not apply if unanimity is required; or when
there is a
designation of respective duties.
Specific Rules
(a) Each may separately execute all acts of administration
(unlimited powers to administer).
(b)Except if any of the managers should oppose. (Here the
decision of the MAJORITY of the managers shall prevail.)
(Suppose there is a tie, the partners owning the CONTROLLING
INTEREST prevail — provided they are also managers.)
[NOTE: The rights to oppose is not given to non-
managers because in appointing their other partners as
managers, they have stripped
themselves of all participation in the administration.
When Opposition May Be Made - When must the other managers make
the opposition?
ANS.: Before the acts produce legal effects insofar as third
persons are concerned.
Reason — For them to delay or for them to protest after
third parties are affected would be unfair to said third
parties. Moreover, the acts
of the firm would be unstable
Art. 1802. In case it should have been stipulated that none of

the managing partners shall act without the consent of
the others, the
concurrence of all shall be necessary for the validity of the
acts, and the absence or disability of any one of them
cannot be alleged, unless there
is imminent danger of grave or irreparable injury to the
partnership.
When Unanimity Is Required

(a) This Article applies when there must be unanimity in
the actuations of the managers.
(b) Suppose one of the managers is absent or
incapacitated, is unanimity still required? ANS.: Yes, for
absence or incapacity is no
excuse. EXCEPTION — when there is imminent danger of grave
or irreparable injury to the partnership. (Art. 1802).
Duty of Third Persons - The rule that third persons are not
required to inquire as to whether or not a
partner with whom he transacts has
the consent of all the managers, for the presumption is that
he acts with due authority and can bind the partnership
applies only when they
innocently deal with a partner apparently carrying on in the
usual way the partnership business (See Art. 1818) because under
Art. 1802, it
is imperative that if unanimity is required it is essential
that there be unanimity; otherwise, the act shall not be valid,
that is, the
partnership is not bound. (Art. 1802, first clause). It would be
wise therefore if the third person could inquire whether
or not unanimity is
required, and if so, if such unanimity is present. This is
for his own protection. Thus, it has been held that a sale
by a partner of partnership
assets without the consent of the other managers is not
valid.
Art. 1803. When the manner of management has not been agreed
upon, the following rules shall be observed:
(1) All the partners shall be considered agents and whatever
any one of them may do alone shall bind the partnership,
without prejudice to
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ATTY. BATUNGBAKAL
the provisions of Article 1801.

(2) None of the partners may, without the consent of the
others, make any important alteration in the immovable
property of the partnership,
even if it may be useful to the partnership. But if
the refusal of consent by the other partners is
manifestly prejudicial to the interest of the
partnership, the court’s intervention may be sought.
Rules to Be Observed When Manner of Management Has Not Been

Agreed Upon
(a) Generally, each partner is an agent.
(b) Although each is an agent, still if the acts of
one are opposed by the rest, the majority should
prevail (Art. 1801) for the presumed intent
is for all the partners to manage, as in Art. 1801.
(c) When a partner acts as agent, it is understood
that he acts in behalf of the firm; therefore when he
acts in his own name, he does not
bind the partnership generally. Generally, a sale made by a
partner of partnership property is not binding on the
firm if not authorized.
However, said transaction may be ratified as when the proceeds
thereof are spent for the benefit of the firm.
(d) On the other hand, paragraph 1 or the authority to
bind the firm does not apply if somebody else had been given
authority to manage
in the articles of organization or thru some other means.
Of course, proof on this point that somebody else was
authorized must be given;
otherwise, the general rule — “all are agents” — prevails.
(e) Alterations require unanimity. (Art. 1803, No. 2).
Rule on Alterations
(a) Par. 2 deals with “important alterations” in “immovable
property of the partnership.” Why is the reference only
to immovables? ANS.:
First, because of their comparative greater importance than
personalty. Second, because, in a proper case, they should
be returned to the
partners in the same condition as when they were delivered to
the partnership. (11 Manresa 393).
(b) “Alteration” here contemplates useful expenses, not
necessary ones.
(c) Consent of the others may be express or
implied (as when the partners had knowledge of the
alteration and no opposition was made by
them).
Art. 1804. Every partner may associate another person with him
in his share, but the associate shall not be admitted
in the partnership
without the consent of all the other partners, even if the
partner having an associate should be a manager.
Associate of Partner
(a) For a partner to have an associate in his share,
consent of the other partners is not required.
(b) For the associate to become a partner, ALL must
consent (whether the partner having the associate is
a manager or not).
Reasons:
1) mutual trust is the basis of partnership;
2) change in membership is a modification or
novation of the contract.
Art. 1805. The partnership books shall be kept, subject to any

agreement between the partners, at the principal place of
business of the
partnership, and every partner shall at any reasonable hour have
access to and may inspect and copy any of them.
Partnership Books
(a) The right in this Article is granted to enable the
partner to obtain true and full information of the
partnership affairs (Art. 1806), for
after all, he is a co-owner of the properties, including the
books. (Art. 1811).
(b) However, the Article presupposes a “going partnership,”
not one pending dissolution, for here the right depends
on the court’s
discretion; nor to one already dissolved, for here, although the
books belong to all the partners (in the absence of
a contrary agreement),
still no single partner is duty-bound to continue the place
of business for the benefit of the others. Neither
is a purchaser of the firm’s
goodwill duty-bound to keep the books for the inspection of the
former partners.
(c) Art. 1806 says a reasonable hour.” What is this? Our
Supreme Court has held that the reasonable hour should be
on business days
throughout the year, and not merely during some capricious or
arbitrary period selected by the managers.
Value of Partnership Books of Account as Evidence - They

constitute an admission of the facts stated therein, an
admission that can be
introduced as evidence against the keeper or maker thereof.
And this is true even if the books are kept strictly in
accordance with the
provision of the law. The only way out is to prove that the
entries had been placed therein as a result of
fraud or mistake, which of course
must be proved.
Art. 1806. Partners shall render on demand true and full

information of all things affecting the partnership to any
partner or the legal
representative of any deceased partner or of any partner
under legal disability.
Duty of Partners to Give Information

Reason for the law — There must be no concealment between
partners in all matters affecting the firm’s interest.
This is required by good
faith. Thus, this duty to give on demand “true and full
information.”
NOTE: Even without the demand, honesty demands the giving

of vital information, the refraining from all kinds of
concealment.
Errors in the Books - If partnership books contain errors,

but said errors have not been alleged, the books must be
considered entirely
correct insofar as the keeper of said books of account
is concerned.
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Who Can Demand Information - Note that under Art. 1806, the
following are entitled to true and full information:
(a) any partner
(b) legal representative of a dead partner
(c) legal representative of any partner under legal disability
[NOTE: The duty to give information is distinct from the duty

to account under Art. 1807.]
Art. 1807. Every partner must account to the partnership for any
benefit, and hold as trustee for it any profits
derived by him without the
consent of the other partners from any transaction connected with
the formation, conduct, or liquidation of the partnership or
from any use by
him of its property.
Duty to Account
(a) Reason for the law: The fiduciary relations between
the partners are relationships of trust and confidence which
must not be abused or
used to personal advantage.
(b) The trust relations exist only during the life of the
partnership, not before, nor after. Hence, fiduciary
relations do not exist between the
persons still negotiating for the formation of partnership. The
trust relations end with the death of the partnership unless
the foundation
for the breach of trust took place even during the existence
of the firm.
Art. 1808. The capitalist partners cannot engage for their own
account in any operation which is of the kind of
business in which the
partnership is engaged, unless there is a stipulation to the
contrary.
Any capitalist partner violating this prohibition shall bring to the
common funds any profits accruing to him from his
transactions, and shall
personally bear all the losses.
Business Prohibition on Capitalist Partners - Note that while the

industrial partner is prohibited from engaging “in business
for
himself” (any business), the capitalist partner is prohibited from
engaging for his own account in any operation “which
is of the kind of
business in which the partnership is engaged” (same or similar
business that may result in competition). The competition
may become
unfair in view of the knowledge by the capitalist partner
of the firm’s business secrets.
Instances When There Is No Prohibition

(a) When it is expressly stipulated that the capitalist
partner can so engage himself. (Art. 1808, par. 1).
(b) When the other partners expressly allow him to do so.
(c) When the other partners impliedly allow him to do so.
(Example: When ALL of them are likewise violating the
article.)
(d) When the company ceases to be engaged in
business (hence during the period of liquidation and
winding up, the article no longer
applies, even if the “engaging” partner is himself the
“liquidating partner”). (2 Vivante 107-108). The reason
is clear: there can possibly be
no unfair competition.
(e) When the general-capitalist partner becomes merely
a limited partner in a competitive enterprise for after
all, a limited partner does
not manage.
Effect of Violation
(a) the violator shall bring to the partnership all the profits
illegally obtained
(b)but he shall personally bear all the losses.
[NOTE: Suppose he gains a total of P10 million and losses
for a total of P2 million, how much must he bring to
the firm?
ANS.: Strictly construed, he must bring P1 million, and suffer
the P2 million loss all by himself; however this would
be unduly harsh, and the
proper interpretation, it is submitted, is for him to
give only P8 million. In other words, losses can be
deducted from profits. It is only net
losses which he must shoulder.]
(c) Although not mentioned in the law expressly, it is
believed that the violator can be ousted from the firm
on the ground of loss of trust
and confidence, particularly if the violation is repeated after
due warning. This would of course result in the
dissolution of the firm.
Art. 1809. Any partner shall have the right to a formal

account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business
or possession of its property by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by Article 1807;
(4) Whenever other circumstances render it just and reasonable.
Right to Demand a Formal Account

(a) Generally, no formal accounting is demandable till after
dissolution. Reason: After all there is access to the
books. (Art. 1805).
(b) However, in the instances enumerated in Art. 1809, it
is evident that the formal accounting can properly and
justifiably be asked for
thus:
1) in No. 1 — he may have access to the books
2) in No. 2 — there is no express stipulation
3) in No. 3 — it is unfair if other partners
can take undue advantage of partnership funds or partnership
transactions.
(See Art. 1807).
4) in No. 4 — as when one partner has been
travelling for a long period of time on a business
involving the firm.
[NOTE: In no other case can a formal accounting be
demanded.
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Estoppel - An accounting made cannot be questioned anymore

if it was accepted without objection for this would now
be a case of estoppel,
unless of course fraud and error are alleged and proved.
Stipulation About Continuing Share - If a partnership is entered

into by 2 physicians, with the stipulation that should one
of them join
the Army, the remaining partner continuing to practice would give
the former 25% of the net profits — such stipulation
is valid, and
proper accounting should be made. Of course, if the
practicing doc- tor does not want to continue practicing
anymore, this is all right.
Section 2 PROPERTY RIGHTS OF A PARTNER
Art. 1810. The property rights of a partner are:

(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management.
Property Rights of a Partner

(a) Example of “specific partnership property”: A and
B each contributed a car for the partnership. The
two cars are specific
partnership property.
(b) Example of “interest in the partnership” — the
partner’s share of the profits and losses (without
mentioning any particular or
specific property).
(c) Note that the right to participate in the management is
a very valuable property right.
Art. 1811. A partner is co-owner with his partners of

specific partnership property.
The incidents of this co-ownership are such that:
(1) A partner, subject to the provisions of this Title and
to any agreement between the partners, has an equal right
with his partners to possess
specific partnership property for partnership purposes; but he has
no right to possess such property for any other purpose
without the consent
of his partners;
(2) A partner’s right in specific partnership property is not
assignable except in connection with the assignment of rights
of all the partners in
the same property;
subject to attachment or execution, except on a claim
against the partnership. When partnership property is attached
for a partnership debt the partners, or any of them, or
the representatives of
a deceased partner cannot claim any right under the homestead
or exemption laws;
subject to legal support under Article 291.
Co-Ownership in Specific Partnership Property - The law says

“a partner is co-owner with his partners of specific
partnership
property.” What does this mean?
ANS.: Simply that they are co-owners (tenants in common with
proportional, sometimes equal) right thereto. However, the
rules on coownership do not necessarily apply; the rules on
“co-ownership in partnership” are applicable. Said rules are
detailed in the subsequent
paragraphs.
Rights of a Partner in Specific Partnership Property -

(Example: a car contributed by one of the partners to
the partnership)
(a) In general, he has an equal right with his partners
to possess the car but only for partnership purposes (not
for other purposes, except
if the others expressly or impliedly give their consent).
(b) He cannot assign his right in the car (except
if all the other partners assign their rights in the
same property).
[NOTE: If this rule is violated, the assignment is VOID, where
the other partners were able to recover what had been sold
or
assigned. The same rule applies if the right is mortgaged. The
assignee or purchaser does NOT become a co-owner of
the specific
partnership property with the other partners.]
(NOTE: Reason for rule of non-assignability: It is hard
to determine how much it exactly is until after
liquidation.)
(c) His right in the car is not subject to the attachment
or execution (except on a claim against the
partnership).
(NOTE: If there is a partnership debt, the specific property
can be attached. Here, the partners or any of them or
the
representatives of a deceased partner cannot claim any right
under the homestead or exemption laws. This is because in
a sense,
the property is not considered their individual or separate
property.)
[NOTE: Reason why in general, the right of the partner
in the car cannot be attached by his separate or
individual creditor: If he
cannot make a voluntary assignment, neither should his
separate creditors be allowed an involuntary assignment
because “the
beneficial rights of the separate creditors of a partner
in specific partnership property should be no greater
than the beneficial
rights of their debtor.”
(d) His right in the car is NOT subject to legal support
under Art. 291 (said Article enumerates the people who are
obliged to support each
other).
Art. 1812. A partner’s interest in the partnership is his share

of the profits and surplus.
A Partner’s Interest in the Partnership - While in general,

a partner’s interest in specific partnership property cannot
be assigned,
cannot be attached, and is not subject to legal support,
a partner’s interest in the partnership (his share in the
profits and surplus) can in
general be assigned, be attached, be subject to legal
support.
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Art. 1813. A conveyance by a partner of his whole interest

in the partnership does not of itself dissolve the
partnership, or, as against the other
partners in the absence of agreement, entitle the assignee,
during the continuance of the partnership, to interfere
in the management or
administration of the partnership business or affairs, or to
require any information or account of partnership
transactions, or to inspect the
partnership books; but it merely entitles the assignee to
receive in accordance with his contract the profits to
which the assigning partner
would otherwise be entitled. However, in case of fraud in the
management of the partnership, the assignee may avail
himself of the usual
remedies.
In case of a dissolution of the partnership, the assignee
is entitled to receive his assignor’s interest and may
require an account from the date
only of the last account agreed to by all the partners.
Effects of Conveyance By Partner of His Interest in the

Partnership
(a) If a partner CONVEYS (assigns, sells, donates)
his WHOLE interest in the partnership (his share in the
profits and surplus), either of
two things may happen:
1) the partnership may still remain; or
2) the partneship may be dissolved.
(NOTE: However, such mere conveyance does NOT of itself
dissolve the firm, therefore in general the partnership
remains.)
(b) The assignee (conveyee) does not necessarily become a
partner. The assignor is still the partner, with a right
to demand accounting
and settlement.
(c) The assignee cannot even interfere in the management
or administration of the partnership business or affairs.
(d) The assignee cannot also demand:
1) information;
2) accounting;
3) inspection of the partnership books.
Rights of the Assignee

(a) To get whatever profits the assignor-partner would have
obtained.
Question: Is he to be considered an outside creditor who
would be entitled to collect before the partners get
their own profits?
ANS.: No, for he merely shares in the profits, the same
as the assignor-partner whose share he (the assignee) will
now get.
Hence, outside creditors would have to be preferred.
(b) To avail himself of the usual remedies in case of
fraud in the management.
(c) To ask for annulment of the contract of assignment
if he was induced to enter into it thru any of the
vices of consent (fraud, error,
intimidation, force, undue influence) or if he himself was
incapacitated to give consent (minor, insane).
(d) To demand an accounting — (but only if indeed
the partnership is dissolved, but even then, the account can
cover the period only
from the date of the last accounting which has been agreed to
by all the partners). (Art. 1813, 2nd paragraph).
Rule in Case of Mortgages - Does Art. 1813 cover also a case

when the partner merely mortgages his interest in the
profits?
ANS.: Yes, but here said interest is not alienated; it is merely
given as security, and therefore the rules on securities for
loans, etc. can
properly apply.
Art. 1814. Without prejudice to the preferred rights of

partnership creditors under Article 1827, on due application
to a competent court by
any judgment creditor of a partner, the court which entered
the judgment, or any other court, may charge the
interest of the debtor partner
with payment of the unsatisfied amount of such judgment debt
with interest thereon, and may then or later appoint a
receiver of his share of
the profits, and of any other money due or to fall due to
him in respect of the partnership, and make all other
orders, directions, accounts and
inquiries which the debtor partner might have made, or which the
circumstances of the case may require.
The interest charged may be redeemed at any time before
foreclosure, or in case of a sale being directed by
the court, may be purchased
without thereby causing a dissolution:
(1) With separate property, by any one or more of the
partners; or
(2) With partnership property, by any one or more of the
partners with the consent of all the partners whose
interests are not so charged or
sold.
Nothing in this Title shall be held to deprive a partner
of his right, if any, under the exemption laws, as
regards his interest in the partnership.
Charging the Interest of a Partner

Example: A, B and C are partners. A personally owes X
a sum of money. X sues A, and obtains a final
judgment in this favor. But A has no
money. What can X do?
ANS.: X may go to the same court (or any other court possessed
of jurisdiction) and ask that A’s interest in the
partnership be “charged”
(attached, or levied upon) for the payment to him (X) of
whatever has not yet been paid him with interest thereon.
[NOTE: While a partner’s interest in the partnership (his share
in the profits or surplus) may be charged or levied
upon, his interest in a
specific firm property cannot as a rule be attached.]
Preferential Rights of Partnership Creditors

The law says “without prejudice to the preferred rights of
partnership creditors under Art. 1827.”
What does this mean?
ANS.: This simply means that partnership creditors are entitled to
priority over partnership assets (including the partner’s
interest in the
profits), that is, the separate creditors will get only after the
firm creditors have been satisfied.
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ATTY. BATUNGBAKAL
Art. 1827 reads: “The creditors of the partnership shall be

preferred to those of each partners as regards the part-
nership property.
Without prejudice to this right, the private creditors of
such partner may ask the attachment and public sale of
the share of the latter in the
partnership assets.”
NOTE:
(a) Partnership creditors have preference in partnership as-
sets.
(b) Separate or individual creditors have preference in
separate or individual properties (not those included in the
firm).]
Receivership
(a) When the charging order is applied for and granted,
the court MAY (discretionary) at the same time or later
appoint a receiver of the
partner’s share in the PROFITS or other MONEY due him. (Art. 1814).
(b) The receiver appointed is entitled to any RELIEF

necessary to conserve the partnership assets for partnership
purposes. Thus, he may
nullify all efforts to assign specific partnership property.
(c) Suppose the other partners owe the firm some money, may
the receiver be authorized to demand that such amount
be collected?
HELD: Yes, for such credit forms part of the partnership assets.
Redemption of the Interest Charged

(a) “Redemption” here merely means the extinguishment of
the charge or attachment on the partner’s interest in
the profits.
(b) How is this “redemption” made?
ANS.:
1) The “charge” may be “redeemed” or bought at any-
time BEFORE foreclosure.
2) AFTER foreclosure, it may still be “bought,” with
separate property (by any one or more of the partners);
or with partnership
property (with consent of all the other partners). (NOTE:
The consent of the delinquent partner is not needed.)
Exemption Laws - Regarding a partner’s interest in the

partnership, may the partner still avail himself of the
exemption laws?
ANS.: Yes, because in a sense, this is his private
property.
[NOTE: He cannot however avail himself of the exemption
laws insofar as his interest in specific partnership
property is concerned. (Art.
1811, No. 3).]
Section 3 : OBLIGATIONS OF THE PARTNERS WITH REGARD TO

THIRD PERSONS
Art. 1815. Every partnership shall operate under a firm name, which may
or may not include the name of one or more of the
partners.
Those who, not being members of the partnership, include their
names in the firm name shall be subject to the liability
of a partner.
Firm Name
(a) This is the name of the juridical entity.
(b) Under Art. 126 of the Code of Commerce, the name of
at least one of the general partners in the general
partnership should appear
with the words “and company” (in case not all the partners were
included). The rule has now been changed. Thus, under the
Civil Code,
the firm name may or may not include the name of one or
more of the partners.
(c) Suppose the firm name is changed in good faith but
the members remain the same, will the partnership under the
new name retain all
the rights it had under the old name? ANS.: Yes.
Liability of Strangers Who Include Their Names - Strangers (those

not members of the partnership) who include their names
in the firm
are liable as partners because of estoppel (Art. 1815, par.
2) but do not have the rights of partners for after
all, they had not entered into
any partnership contract. The purpose of the law is to
protect customers from being misled as to whom they are
dealing with.
[NOTE: If a person misrepresents himself as a
partner, and as a consequence thereof, a stranger is
misled, the deceiver is liable as a partner
(without the rights of a partner) and this is true, even
if he did not include his name in the firm name.]
[NOTE: Under Art. 1846, if a limited partner includes his
name in the firm name, he has obligations, but not the
rights of, a general partner.]
[NOTE: The mere fact that a partnership has assumed a
fictitious or assumed name, other than its real one, does not
affect the validity of
contracts otherwise validly entered into.
Art. 1816. All partners, including industrial ones, shall be liable

pro rata with all their property and after all the partnership
assets have been
exhausted, for the contracts which may be entered into in the
name and for the account of the partnership, under its
signature and by a person
authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a
partnership contract.
Liability Distinguished from Losses While an industrial partner
is exempted by law from losses (as between the
partners), he is not
exempted from liability (insofar as third persons are concerned).
This means that the third person can sue the firm and the
partners,
including the industrial partner. Of course, the partners will
be personally liable (jointly or pro rata) only after the
assets of the
partnership have been exhausted. Even the industrial partner would have
to pay, but of course he can recover later on what
he has paid,
from the capitalist partners, unless there is contrary agreement.
Liability of a Partner Who Has Withdrawn - A partner

who withdraws is not liable for liabilities contracted after
he has withdrawn, for
then he is no longer a partner. If his interest has
not yet been paid him, his right to the same is that of
a mere creditor.
Unequal Contribution of Capitalist Partners - Suppose

capitalist partners had contributed unequally to the capital,
will their liability to
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ATTY. BATUNGBAKAL
strangers be equal or proportionate to their contributions?

ANS.: Proportionate for the law says “pro rata” (proportionate). (See
Art. 1815).
Effect of Stipulation Exempting Liability to Third Persons -

Suppose it is stipulated that all the industrial partners
and some of the
capitalist partners would be exempted from liability insofar as
third persons are concerned, would the stipulation be valid?
ANS.: The stipulation would be null and void.
Comment of the Code Commission - “The basic rule (formulated in

Art. 1698 of the old Code for civil partnerships) on the
personal but
subsidiary liability of the partners pro rata for the obligations
of the partnership has been retained. The Commission considers
the solidary
liability laid down in the Code of Commerce (for commercial
partnerships) as inadvisable, such liability being the cause
for the reluctance
and fear with which the formation of business partnerships has
been regarded by all.”
Partner Acting in His Own Name -Note that under Art. 1816, any
partner may however “enter into a separate obligation
to perform a
partnership contract.” (Here, he does not act in behalf of
the partnership; he acts in his own name, although for
the benefit of the
partnership.)
Art. 1817. Any stipulation against the liability laid down in the
preceding article shall be void, except as among the
partners.
Stipulation Eliminating Liability

Query: As among the partners, is it permissible to stipulate
that a capitalist partner be exempted from liability?
ANS.: The answer is YES, under Art. 1817. And yet under Art. 1799,
a stipulation which excludes one or more partners (capitalist)
from any
share in the profits or losses is VOID. How can these two
articles be reconciled? It would seem that the only way to
harmonize the two
articles (insofar as capitalist partners are concerned) is this:
it is permissible to stipulate among them that a capitalist
partner will be
exempted from liability in excess of the original capital
contributed; but will not be exempted insofar as his
capital is concerned.
Example: A, B, and C, capitalist partners, each contributed P1
million. The firm’s indebtedness amounts to P9
million. It was stipulated
that A would be exempted from liability. Assuming that the
capital of P3 million is still in the firm, what would
be the rights of the firms
creditors?
ANS.: To get the P3 million and to get still P2 million
each from the 3 partners (a total of P9 million). A
will thus be liable to the third
persons for P2 million. How much, if any, can A recover
from B and C? It is submitted that he can recover
P2 million from B and C (P1
million each) for as to liability as among them, he is
exempted (Art. 1817) but he cannot recover his original
capital of P1 million. (Art.
1799).
‘Liability’ and ‘Losses’ Distinguished- Note that while in general

“liability” refers to responsibility towards third persons,
and “losses”
refers to responsibility as among the partners, still Art. 1817,
a new codal provision, can refer to “liability” as “among
the partners.”
Art. 1818. Every partner is an agent of the partnership for the

purpose of its business, and the act of every partner,
including the execution in
the partnership name of any instrument, for apparently carrying on
in the usual way the business of the partnership of which
he is a member
binds the partnership, unless the partner so acting has
in fact no authority to act for the partnership in the
particular matter, and the person
with whom he is dealing has knowledge of the fact that he
has no such authority.
An act of a partner which is not apparently for the
carrying on of business of the partnership in the usual
way does not bind the partnership
unless authorized by the other partners.
Except when authorized by the other partners or unless they
have abandoned the business, one or more but less than all
the partners have no
authority to:
(1) Assign the partnership property in trust for creditors or
on the assignee’s promise to pay the debts of the
partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it impossible to carry
on the ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or
liability;
(6)Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a
restriction on authority shall bind the partnership to persons
having knowledge of the restriction.
When A Partner Can Bind or Cannot Bind the Firm - This
Article speaks of:
(a) the fact that the partner is an agent;
(b) the instances when he can bind the partnership;
(c) the instances when he cannot bind the partnership (in
which case, should he enter into the contract, he alone,
and not the firm nor the
partner would be liable).
Agency of a Partner
It has been truthfully said that a partnership is a contract
of “mutual agency,” each partner acting as a
principal on his own behalf, and as
an agent for his co-partners or the firm.
When Can a Partner Bind the Partnership
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A partner binds the partnership when the following requisites are

present:
a) when he is expressly authorized or impliedly authorized;
b) when he acts in behalf and in the name of the
partnership.
Instances of implied
authorization:
1) when the other partners do not object, although they have
knowledge of the act;
2) when the act is for “apparently carrying on in the usual
way the business of the partnership.” (This is binding
on the firm even if
the partner was not really authorized, provided that the third
party is in GOOD FAITH.)
When Will the Act of the Partner Not Bind the Partner- ship
(a) When, although for “apparently carrying on in the usual
way the business of the partnership,” still the partner
has in fact NO
AUTHORITY, and the 3rd party knows that the partner has no
authority. (This is to penalize customer or client in
bad faith.)
(b) When the act is NOT for “apparently carrying on in
the usual way” of the partnership and the partner has NO
AUTHORITY.
(NOTE: Here, whether or not the 3rd party knows of the
LACK of AUTHORITY is NOT IMPORTANT. As long as there was
really no authority,
the firm is not bound.)
[NOTE: The 7 kinds of acts enumerated in Art. 1818 are
instances of acts which are NOT for “apparently carrying on
in the usual way
the business of the partnership.” In those seven instances, the
authority must be UNANIMOUS (from ALL the partners) except
if the
business has been abandoned.]
Reasons Why the 7 Acts of Ownership are “Unusual”
(a) “assign the partnership property” — the firm will virtu-
ally be dissolved
(b) “dispose of the goodwill” — goodwill is valuable
property
(c) “do any other act which would make it impossible to
carry on” — this is evidently prejudicial
(d) “confess a judgment” — if done before a case
is filed, this is null and void; if done later, the
firm would be jeopardized
(e) “compromise” — this is an act of ownership and
may be said to be equivalent to alienation (which may
not be justified)
(f) “arbitration” — this is also an act of ownership
which may not be justified
(g) “renounce a claim” — why should a partner
renounce a claim that does not belong to him but to
the partnership?
Art. 1819. Where title to real property is in the partnership

name, any partner may convey title to such property by
a conveyance executed in
the partnership name; but the partnership may recover such property
unless the partner’s act binds the partnership under the
provisions of the
first paragraph of Article 1818, or unless such property has
been conveyed by the grantee or a person claiming
through such grantee to a
holder for value without knowledge that the partner, in making
the conveyance, has exceeded his authority.
Where title to real property is in the name of the partnership,
a conveyance executed by a partner, in his own name,
passes the equitable
interest of the partnership, provided the act is one within
the authority of the partner under the provisions of the
first paragraph of Article
1818.
Where title to real property is in the name of one or more
but not all the partners, and the record does not dis-
close the right of the
partnership, the partners in whose name the title stands may
convey title to such property, but the partnership may
recover such property if
the partner’s act does not bind the partnership under the provisions
of the first paragraph of Article 1818, unless the
purchaser or his assignee,
is a holder for value, without knowledge.
Where the title to real property is in the name of one or
more or all partners, or in a third person in trust
for the partnership, a conveyance
executed by a partner in the partnership name, or in his
own name, passes the equitable interest of the partnership,
provided the act is one
within the authority of the partner under the provisions of
the first paragraph of Article 1818.
Where the title to real property is in the names of all the
partners a conveyance executed by all the partners passes
all their rights in such
property.
Conveyance of Real Property

(a) This is a particular elaboration of Art. 1818, but is
applicable to real property alone.
(b) The Article was adopted to do away with the
existing uncertainty surrounding the subject of the conveyance
of real property belonging
to the partnership
(c) It will be noticed that in some instances, what is
conveyed is TITLE, and in other instances, what is
conveyed is merely the “EQUITABLE
INTEREST.” What does this phrase mean? ANS.: An equitable
interest or title is one not only recognized by law, but
also by the principles of
equity. (See 30 C.J.S. 401). Evidently, as used in Art. 1819,
it refers to “all interest which the partnership had, except
TITLE,” that is, the
beneficial interests like use, fruits, but not the naked ownership.
(d) Art. 1819 speaks of “to convey” or a “conveyance.”
Doubt- less this includes a sale, or a donation. Does
it include a mortgage?
ANS.: While under the rules of agency, a special power to sell
does not include the power to mortgage, and vice uersa (Art.
1879), still Art.
1819 has been interpreted in the U.S. to include under the term
“conveyance” the right to mortgage. (See Bosler v.
Sealfrom, 1923, 92 Pa.
Super. Ct. 254).
(e) Notice that real property may be registered or owned in
the name of:
1) the partnership;
2) all the partners;
3) one, some, or not all the partners;
4) one, some, or not all the partners in TRUST for the
partnership;
5) third person in TRUST for the partnership.
Notice also the act of conveyancing may be in the

name of the registered owner or in the name of the
partners all together, or in the
name of one, some but not all of the partners, or in the
name of the partnership (the registration being apparently
disregarded).
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Art. 1820. An admission or representation made by any partner

concerning partnership affairs within the scope of his
authority in accordance
with this Title is evidence against the partnership.
Admission or Representation Made By a Partner - Generally,

an admission by a partner is an admission against
the partnership under
the conditions given:
(a) the admission must concern partnership affairs
(b) within the scope of his authority
Restrictions on the Rule

(a) Admissions made BEFORE dissolution are binding only when
the partner has authority to act on the particular
matter.
(b) Admissions made AFTER dissolution are binding only if the
admissions were necessary to WIND UP the business.
Reason: If the admission is not the “act of the partnership
(thru the partner), it should NOT be evidence against
it.” The words “within the
scope of his authority” produce this result.
Previous Admission - When is a previous admission (not
present court testimony) of a partner admissible in
evidence against the
partnership?
ANS.: When it was made WITHIN the scope of the partnership,
and DURING its existence, provided of course that the
existence of the
partnership is first proved by evidence OTHER than such act or
declaration.
Art. 1821. Notice to any partner of any matter relating

to partnership affairs, and the knowledge of the partner
acting in the particular
matter, acquired while a partner or then present to his
mind, and the knowledge of any other partner who reasonably
could and should have
communicated it to the acting partner, operate as notice
to or knowledge of the partnership, except in the
case of a fraud on the partnership,
committed by or with the consent of that partner.
Effect of Notice to a Partner

(a) In general, notice to a partner is notice to
the partnership, that is, a partnership cannot claim
ignorance if a partner knew. BUT this
rule has restrictions and qualifications.
(b) Notice to a partner, given while ALREADY a partner,
is a notice to the partnership, provided it
relates to partnership affairs.
Effect of Knowledge Although No Notice Was Given - It

may be that no notice has been given, but knowledge
has been somehow acquired.
(Thus, while nobody made any notification, still the partner
perhaps because of analysis or deduction came to know
of something.) Is this
knowledge of a partner also to be considered knowledge of
the partnership?
ANS.: Knowledge of the partner is also knowledge of the firm
provided:
(a) The knowledge was acquired by a partner who is
acting in the particular matter involved. (NOTE:
The knowledge may have been
acquired while already a partner, or even PRIOR TO THAT TIME,
provided he still remembers the same, that is, “present to
his mind.”)
(b) Or the knowledge may have been acquired by a
partner NOT acting in the particular matter involved.
But here it is essential that “the
partner having ‘knowledge’ had reason to believe that the
fact related to a matter which had some possibility of
being the subject of the
partnership business, and then only if he was so situated
that he could communicate it to the partner acting in
the particular matter
before such partner gives binding effect to his act. The
words “who reasonably could and should have communicated it
to the acting
partner accomplish this result.”
.
NOTE: Here, the knowledge must have been obtained while ALREADY a
partner, because the phrase “then present to his mind”
applies only to the partner ACTING in the particular matter
involved
Service of Pleading on a Partner in a Law Firm -

It has been held that service of pleadings on the
partner in a law firm is also service on
the whole firm and the other partners. (As a matter of fact,
service on the firm, as evidenced by the signature of
the receiving clerk of the
firm who received in behalf of the firm, is indeed
service on the law partners, and this is true whether
or not the clerk forgot to inform the
partners.) It has also been held that service on a partner
is effectual not only to bind the party served but also
to reach the assets of the
partnership
Art. 1822. Where, by any wrongful act or omission of any

partner acting in the ordinary course of the
business of the partnership or with the
authority of his co-partners, loss or injury is caused
to any person, not being a partner in the partnership,
or any penalty is incurred, the
partnership is liable therefor to the same extent as
the partner so acting or omitting to act.
Wrongful Act or Omission of a Partner - Example: A,
B, and C were partners. While acting within the scope
of the firm’s business, A
committed a tort against X, a third person. Is the firm
liable?
ANS.: Yes. (Art. 1822). Moreover A, B, and C, as well as
the firm itself, are liable in solidum. (Art. 1824).
Note that even the innocent partners
are civilly personally liable, without prejudice of course
to their right to recover from the guilty partner. (See
Art. 1217).
Injury to an Employee - The law speaks of an injury

to “any person, not being a partner.”
Does Art. 1822 apply to an injury to an employee, not a
partner, of the firm?
ANS.: It would seem that the answer is YES, for a mere
employee is not necessarily a partner.
When the Firm and the Other Partners are NOT Liable
(a) If the wrongful act or omission was not done within
the scope of the partnership business and for its benefit)
or with the authority
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ATTY. BATUNGBAKAL
of the co-partners. (Art. 1822).

(b) If the act or omission was NOT wrongful. (See Art.
1822 which uses the term “wrongful”.)
(c) If the act or omission, although wrongful, did not
make the partner concerned liable himself.
(d) If the wrongful act or omission was committed after the
firm had been dissolved (stopped its business) and same was
not in
connection with the process of winding up.
Art. 1823. The partnership is bound to make good the loss:

(1) Where one partner acting within the scope of his
apparent authority receives money or property of a third
person and misapplies it; and
(2) Where the partnership in the course of its business
receives money or property of a third person and the
money or property so received is
misapplied by any partner while it is in the custody of
the partnership.
Liability of Partnership for Misappropriation - The difference

between par. 1 and par. 2 is that in the former
the misappropriation is
made by the receiving partner, while in the latter, the
culprit may be any partner. The effect however is
the same in both cases, as can be
seen from Art. 1824.
Art. 1824. All partners are liable solidarily with the partnership
for everything chargeable to the partnership under Articles 1822
and 1823.
Solidary Liability of the Partners With the Partnership

(a) While in torts and crimes, the liability of the partners
is solidary, in contractual obligations, it is generally
merely joint. (Art. 1816). While
Art. 1816 speaks of pro rata liability of the partners,
and while the Code Commission says that pro rata in this
article means “in
proportion to their contribution” till the Supreme Court has ruled
that “pro rata” here means joint, such that if 5 partners
are liable, each
would be responsible for 1/5 of the debt (regardless of amount
of contribution) and if one of the five would be
excused (as when the
plaintiff after suing the five partners dismisses the claim against
one of them, each of the remaining four would be responsible
for 1/5.
Thus “pro rata” is used in the sense of “joint” to distinguish
the same from solidary liability.
(b) Note that torts and crimes result from individual acts of
the partners; while contractual liabilities arise from partnership
obligations.
(c) Note that it is not only the partners that are liable
in solidum; it is also the partnership.
Art. 1825. When a person, by words spoken or written or

by conduct, represents himself, or consents to another
representing him to anyone,
as a partner in an existing partnership or with one or
more persons not actual partners, he is liable to
any such persons to whom such
representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent
partnership, and if he has
made such representation or consented to its being made in a
public manner he is liable to such person,
whether the representation has or has
not been made or communicated to such person so giving
credit by or with the knowledge of the apparent
partner making the representation
or consenting to its being made:
(1) When a partnership liability results, he is liable as
though he were an actual member of the partnership;
(2) When no partnership liability results, he is liable pro
rata with the other persons, if any, so consenting to the
contract or representation as
to incur liability, otherwise separately.
When a person has been thus represented to be a partner
in an existing partnership, or with one or more
persons not actual partners, he is an
agent of the persons consenting to such representation to bind
them to the same extent and in the same manner as
though he were a partner
in fact, with respect to persons who rely upon the
representation. When all the members of the existing
partnership consent to the
representation, a partnership act or obligation results; but in
all other cases it is the joint act or obligation of the
person acting and the person
consenting to the representation.
Partner and Partnership By Estoppel - This Article refers

to a “partner by estoppel” and to a “partnership
by estoppel.”
How the Problem May Arise - A person may:

(a) represent himself as a partner of an existing
partnership, with or without the consent of the
partnership.
NOTE: If a third person is misled and acts because of
such misrepresentation, the deceiver is a partner by
estoppel. If the partnership
consented to the misrepresentation, a partnership liability
results. We have here a case of “partnership by
estoppel” with the original
members and the deceiver as partners. If the firm had not
consented, no partnership liability results, but the deceiver
is considered still
as a “partner by estoppel,” with all the obligations but not
the rights of a partner.)
(b) represent himself as a partner of a non-existent
partnership. (Here, clearly no partnership liability
results, but the deceiver and all
persons who may have aided him in the misrepresentation are still
liable.)
(NOTE: The liability in such a case would be joint or pro
rata.)
When Estoppel Does Not Apply - When although there is

misrepresentation, the third party is not deceived, the
doctrine of estoppel does
not apply. Note that the law says “liable to any such
persons to whom such representation has been made, who has,
on the faith of such
representation, given credit as to the actual or apparent
partnership.” (Art. 1825).
Burden of Proof - The creditor, or whoever alleges the

existence of a partner or partnership by estoppel has
the burden of proving the
existence of the misrepresentation and the innocent reliance on
it.
Art. 1826. A person admitted as a partner into an

existing partnership is liable for all the obligations of
the partnership arising before his
admission as though he had been a partner when such
obligations were incurred, except that this liability shall be
satisfied only out of
partnership property, unless there is a stipulation to the
contrary.
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ATTY. BATUNGBAKAL
Entry of a New Partner Into an Existing Partnership

Example: A, B, and C are partners. D is admitted as
a new partner. Will D be liable for partnership
obligations contracted PRIOR to his
admission to the partnership?
ANS.: Yes, but his liability will extend only to his share in
the partnership property, not to his own individual proper-
ties. (Art. 1826).
(NOTE: Had he been an original partner, he would be liable
both insofar as his share in the firm is concerned, and
his own individual
property.)
(NOTE: It is understood that the newly admitted partner would
be liable as an ordinary original partner for all
partnership obligations
incurred AFTER his admission to the firm.)
Creation of a New Partnership in View of the Entry - Does

the admission of a new partner dissolve the old firm
and create a new one?
ANS.: Yes, and it is precisely because of this principle that
Art. 1826 has been enacted. The reason is simple: since
the old firm is dissolved,
the original creditors would not be the creditors of the new
firm, but only of the original partners; hence, they may
lose their preference. To
avoid this injustice, under the new Civil Code (together with the new
creditors of the new firm), they are also considered
creditors of the
NEW firm. (See also Art. 1840, which among other things provide that
generally “creditors of the dissolved partnership are also
creditors of
the person or partnership continuing the business.”) Thus, it is
essential that the partnership assets of the new firm (with
the capital of the
new partner) be available even to the old creditors.
[NOTE: It is wrong to state that “the theory that a new

firm is created by the admission of a new partner,
has been abandoned.” It is wrong
because indeed a new firm is created; but the old
creditors of the firm retain their preference as partnership
creditors.]
“Art. 1826 should be read together with Art. 1840. Both are based
on the principle that there has been one continuous business.
The fact
that A has been admitted to the business, or C ceased
to be connected with it, should not be allowed to
cause endless confusion as to the
claims of the creditors on the property employed in the
business. All creditors of the business, irrespective of
the times when they became
creditors, and the exact combinations of persons then owning
the business, should have equal rights in such property.
The recognition of
this principle solves one of the most perplexing problems of
the partnership law.”
Liability of New Partner for Previous Obligations - Is not

the rule of holding the new partner liable (with his
share of the firm’s assets)
for PREVIOUS obligations of the firm unduly harsh on said new
partner?
ANS.: No, it is not unduly harsh. After all “the incoming
partner partakes of the benefit of the partnership
property, and an established
business. He has every means of obtaining full knowledge and
protecting himself, because he may insist on the
liquidation or settlement of
existing partnership debts. On the other hand, the creditors have
no means of protecting themselves
Art. 1827. The creditors of the partnership shall be preferred to

those of each partner as regards the partnership
property. Without
prejudice to this right, the private creditors of each
partner may ask the attachment and public sale of the
share of the latter in the partnership
assets.
Reason for the Preference of Partnership Creditors - After all,

the partnership is a juridical person with whom the
creditors have
contracted. Moreover, the assets of the partnership must first be
exhausted.
Reason Why Individual Creditors May Still Attach the Partner’s

Share - After all, the remainder (after paying partnership
obligations)
really belongs to the partners.
(NOTE: The purchaser at the public sale does not necessarily
become a partner.)
Sale by a Partner of His Share to a Third Party - If

a partner sells his share to a third party, but the
firm itself still remains solvent,
creditors of the partnership cannot assail the validity of
the sale by alleging that it is made in fraud of them,
since they have not really
been prejudiced.
Chapter 3 : DISSOLUTION AND WINDING UP

Art. 1828. The dissolution of a partnership is the change in
the relation of the partners caused by any partner
ceasing to be associated in the
carrying on as distinguished from the winding up of the
business.
Art. 1829. On dissolution the partnership is not terminated, but
continues until the winding up of partnership affairs is
completed.
‘Dissolution’ Defined - is the change in the relation

of the partners caused by any partner ceasing to
be associated in the carrying on of
the business. (Art. 1828). It is that point of time when the
partners cease to carry on the business together.
Winding Up’ Defined - is the process of settling

business affairs after dissolution.
(NOTE: Examples of winding up: the paying of previous
obligations; the collecting of assets previously demandable;
even the contracting
for new business if needed to wind up, such as the
contracting with a demolition company for the demolition of
the garage used in a “used
car” partnership.)
‘Termination’ Defined - is the point in time after all the

partnership affairs have been wound up.
Effect on Obligations
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ATTY. BATUNGBAKAL
(a) Just because a partnership is dissolved, this does not

necessarily mean that a partner can evade previous ob-
ligations entered
into by the partnership.
(b) Of course, generally, dissolution saves the former partners
from new obligations to which they have not expressly or
impliedly
consented, unless the same be essential for winding up.
Art. 1830. Dissolution is caused:

(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular
undertaking specified in the agreement;
(b) By the express will of any partner, who must act in
good faith, when no definite term or particular undertaking
is specified;
(c) By the express will of all the partners who have not
assigned their interests or suffered them to be charged
for their separate
debts, either before or after the termination of any
specified term or particular undertaking;
(d) By the expulsion of any partner from the business bona
fide in accordance with such a power conferred by the
agreement
between the partners;
(2) In contravention of the agreement between the partners,
where the circumstances do not permit a dissolution
under any other provision
of this article, by the express will of any partner at
any time;
(3) By any event which makes it unlawful for the business of
the partnership to be carried on or for the members
to carry it on in partnership;
(4) When a specific thing, which a partner had promised
to contribute to the partnership, perishes before the
delivery; in any case by the loss of
the thing, when the partner who contributed it having
reserved the ownership thereof, has only transferred to the
partnership the use or
enjoyment of the same; but the partnership shall not be dissolved
by the loss of the thing when it occurs after the
partnership has acquired the
ownership thereof;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership;
(7) By the civil interdiction of any partner;
(8) By decree of court under the following article.
Causes of Dissolution
(a) Arts. 1830 and 1831 give the causes for dissolution.
(b) Note that in Art. 1830, eight causes are given, the first
one of which is subdivided into four instances.
No Violation of Agreement
In No. 1 cause (in Art. 1830), the partnership agreement has
NOT been violated —
(a) termination of the definite term or specific undertaking
Here the contract is the law between the parties, if the
firm however still continues after said period, it becomes
a partnership at
WILL.
(b) express will of a partner who must act in good faith
when there is NO definite term and NO specified undertaking
If he insists on leaving in bad faith, the firm is
dissolved, but he may be responsible for damages.
(c) express will of all partners (except those who have AS-
SIGNED or whose interests have been CHARGED)
[NOTE: If one partner says he will not have anything more
to do with the firm, and the other does not object, there
is dissolution
by implied mutual consent.
(d) expulsion in good faith of a member
(NOTE: If one is expelled, the number of partners is
decreased; hence, the dissolution.)
(NOTE: If a partner is expelled in bad faith, there
can also be eventual dissolution for here, there would be
apparent lack of
confidence, without prejudice of course to liability for
damages.)
Cause No. 2 — Violation of Agreement

Even if there is a specified term, one partner may cause its
dissolution by expressly withdrawing even before the ex-
piration of the period,
with or without justifiable cause. Of course, if the cause
is not justified, or no cause was given, the withdrawing
partner is liable for
damages, but in no case can he be compelled to remain
in the firm. With his withdrawal, the number of members
is decreased, hence, the
dissolution.
Reason for allowing withdrawal: Partnership is based on mutual

confidence. Thus, it has been held in one case that even if
a firm still has
three years to run, still a letter received by it from one
partner withdrawing from the firm, served to dissolve the
firm, without prejudice to
resulting damages.
Cause No. 3 — Unlawfulness of the Business

If the business later on becomes unlawful, it follows that
the firm will not be allowed to carry on. On the other
hand if the business or
object had been unlawful from the very beginning, the firm never
had any juridical personality.
Cause No. 4 — LOSS

(a) If a specific thing promised as contribution is lost
BE- FORE delivery.
Reason: The firm is dissolved because the partner has NOT
given his contribution.
(NOTE: If lost after delivery, the firm bears the loss, and the
partner remains, since after all, he had given his
contribution.)
(NOTE: The rules just given do not apply to generic things,
for genus does not perish.)
(b) If only the use of a specific thing is contributed,
and it is LOST BEFORE or AFTER delivery to the firm.
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ATTY. BATUNGBAKAL
Reason: Here, the naked owner reserved the ownership, its loss
is borne by him, so it is as if he had not
contributed anything.
Cause No. 5 — DEATH of ANY Partner

The death of any partner, whether known or unknown to the
others causes a decrease in the number of
partners, hence there is automatic
dissolution (but not automatic termination for the affairs must still
be wound up). Be it noted that a deceased partner is
no longer
associated in the active business of the partnership; in
a sense however, this dissolution may be partial or total:
partial, when the surviving
partners continue the business among themselves; and total, when
the survivors, instead of continuing the enterprise, proceed
to the
liquidation of partnership’s assets.
[NOTE: The status of the firm would be that of a
“partnership in liquidation.”]
Cause No. 6 — Insolvency of any Partner or of the

Partnership
(a) The insolvency need not be judicially declared; it is enough
that the assets be less than the liabilities.
(NOTE: It is submitted that no judicial decree is needed
to dissolve the partnership here, for otherwise, this cause would
have
been inserted under No. 8, “by decree of the court.”)
[NOTE: Contrast the rule just given with the case of an insane
partner. While insanity for the purpose here may be either
declared
judicially or not (as when evidence has been given to show that
the partner is “of unsound mind,” still there must be
a judicial
decree for dissolution). (See Art. 1831, No. 1).]
(b) Reason why insolvency is a ground for dissolution:
The business of a firm requires solvency or ability
to meet the financial demands of
creditors.
Cause No. 7 — Civil Interdiction of any Partner

Civil interdiction (or civil death) results in incapacity to
enter into dispositions of property, inter vivos.
Cause No. 8 — Decree of the Court under Art. 1831

(NOTE: The decree must be a final judgment rendered
by a court of competent jurisdiction.)
Decrease of Causes of Dissolution

Can the partners in their contract decrease or limit the causes
of dissolution?
ANS.: No. (See Lichauco v. Lichauco, 33 Phil. 350, where the
Supreme Court held that a contractual provision prohibiting
dissolution except
by authorization of two-thirds of the members, cannot be
sustained when the firm had lost its capital, or had become
bankrupt, or had
utterly abandoned the enterprise for which it had been organized.)
Art. 1831. On application by or for a partner the court shall

decree a dissolution whenever:
(1) A partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind;
(2) A partner becomes in any other way incapable of
performing his part of the partnership contract;
(3) A partner has been guilty of such conduct as tends
to affect prejudicially the carrying on of the
business;
(4) A partner willfully or persistently commits a breach
of the partnership agreement, or otherwise so conducts
himself in matters relating to
the partnership business that it is not reasonably practicable to
carry on the business in partnership with him;
(5) The business of the partnership can only be carried on
at a loss;
(6) Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner’s interest
under Article 1813 or 1814:
(1) After the termination of the specified term or particular
undertaking;
(2) At any time if the partnership was a partnership at will
when the interest was assigned or when the charging order
was issued.
Dissolution by Judicial Decree - This Article speaks of

a dissolution by decree of the court. In a suit
for dissolution, proof as to the
existence of the firm must first be given.
Who Can Sue for Dissolution
(a) A partner for any of the 6 causes given in
the first paragraph.
(b) The purchaser of a partner’s interest in the partnership
under Art. 1813 or 1814, provided that the period has
expired or if the firm
was a partnership at will when the interest was assigned or
charged.
(NOTE: If the period is not yet over, said purchaser cannot
sue for dissolution.)
Insanity of a Partner
(a) Even if a partner has not yet been previously declared
insane by the court, dissolution may be asked, as
long as the insanity is duly
proved in court.
(b) Reason for making insanity a cause: The partner
will be incapacitated to contract.
Incapability to Perform Part

This may happen when the partner enters the government
service which would prohibit him from participating in the
firm; or when he
will have to stay abroad for a long time.
Prejudicial Conduct or Persistent Breach of the Agreement

(a) When the managers fail to hold regular meetings as
provided for in the agreement, fail to make reform or
to hear grievances, and fail to
give proper financial reports, an action for dissolution would
prosper. The same rule holds if accounting is unjustifiably
refused.
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ATTY. BATUNGBAKAL
(b) True exclusion from the management of one of the persons

authorized to manage, is indeed a ground for
dissolution; but not occasional
friction among the managers or trivial faults, particularly
if the firm is financially prosperous.
Appointment of Receiver
In a suit for dissolution, the court may appoint a
receiver at its discretion but a receiver is not needed
when practically all the firm assets
are in the hands of a sheriff under a writ of replevin
or when the existence of a partnership with the plaintiff
is denied, particularly if the
business of the firm is being conducted successfully.
Time of Dissolution
It is understood that a firm whose dissolution is petitioned for
in court becomes a dissolved partnership at the time the
judicial decree
becomes a final judgment.
Art. 1832. Except so far as may be necessary to wind up

partnership affairs or to complete transactions begun but
not then finished,
dissolution terminates all authority of any partner to act for
the partnership:
(1) With respect to the partner;
(a) When the dissolution is not by the act, insolvency or death
of a partner; or
(b) When the dissolution is by such act, insolvency or death of
a partner, in cases where Article 1833 so requires;
(2) With respect to persons not partners, as declared in
Article 1834.
Effects of Dissolution
(a) When a partnership is dissolved, certain effects are
inevitable, insofar as the relations of the firm toward
third persons are concerned;
and insofar as the partners themselves are affected in their
relations with one another. Arts. 1832, 1833, and 1834 speak of
said
relationships.
(b) Art. 1832 merely states a general rule, that when the
firm is dissolved, a partner can no longer bind the
partnership. The exceptions
will be discussed later.
Effect on Previous Contracts

When a firm is dissolved, does this mean that the contracts
and obligations previously entered into, whether the firm is
the creditor or
the debtor, automatically cease?
ANS.: No, otherwise the result would be unfair. The firm is
still allowed to collect previously acquired credits; it
is also bound to pay off its
debts. A dissolved partnership still has personality for the
winding up of its affairs.
Creditors Who Have Not Been Prejudiced

If the obligations and rights of a dissolved firm are
transferred to another firm, should creditors still hold the
former liable even if said
creditors have not been prejudiced?
ANS.: No more, as long as the new firm can indeed take care
of said creditors. It would be erroneous to let the old
firm still pay, if the new
firm can really pay.
Art. 1833. Where the dissolution is caused by the act, death or

insolvency of a partner, each partner is liable to
his co-partners for his share of
any liability created by any partner acting for the
partnership as if the partnership had not been dissolved
unless:
(1) The dissolution being by act of any partner, the partner
acting for the partnership had knowledge of the dissolution;
or
(2) The dissolution being by the death or insolvency of a
partner, the partner acting for the partnership had
knowledge or notice of the death
or insolvency.
Two Kinds of Causes for Dissolution -- Dissolution may be

caused:
(a) On the one hand by:
A — act (like withdrawing of a partner)
I — insolvency
D — death
(b) On the other hand by other things, like TERMINATION of the
period.
Dissolution Caused by A-I-D

Art. 1833 speaks of dissolution caused by A-I-D, and the
effects on the partners as among themselves, if a
partnership liability is incurred
(that is, if the firm is STILL BOUND).
(NOTE: If the firm is not bound, see Art. 1834, where only
the partner acting is liable.)
Effect of A-I-D
In Art. 1833, all the partners are still bound to each other
generally, except in the 2 instances mentioned, namely:
(a) If the partner acting had KNOWLEDGE (as distinguished
from mere NOTICE, but without actual knowledge), if
dissolution is caused by
an ACT (like withdrawing, retiring). (Here, only the
partner acting assumes liability, in that even if the
firm may be held by strangers, and
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ATTY. BATUNGBAKAL
even if the partners will still be individually liable, still

the other partners can always recover from the partner
acting.)
(b) If the partner acting had KNOWLEDGE or NOTICE, if
dissolution was caused by death or insolvency. Here again,
while the firm may be
liable, in proper cases, recovery can be had by the
other partners from the partner acting.
Art. 1834. After dissolution, a partner can bind the partnership,

except as provided in the third paragraph of this
article:
(1) By any act appropriate for winding up partnership affairs
or completing transactions unfinished at dissolution;
(2) By any transaction which would bind the partnership if
dissolution had not taken place, provided the other party to
the transaction:
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of the dissolution;
(b) Though he had not so extended credit, had nevertheless
known of the partnership prior to dissolution, and having
no knowledge or
notice of dissolution, the fact of dissolution had not been
advertised in a newspaper of general circulation in the
place (or in each place if
more than one) at which the partnership business was regularly
carried on.
The liability of a partner under the first paragraph, No. 2,
shall be satisfied out of partnership assets alone when such
partner had been prior
to dissolution:
(1) Unknown as a partner to the person with whom the
contract is made; and
(2) So far unknown and inactive in partnership affairs that
the business reputation of the partnership could not be said
to have been in
any degree due to his connection with it.
The partnership is in no case bound by any act of a

partner after dissolution:
(1) Where the partnership is dissolved because it is unlawful
to carry on the business, unless the act is appropriate
for winding up
partnership affairs; or
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind up partnership
affairs, except by a transaction with one who —
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of his want of
authority; or
(b) Had not extended credit to the partnership prior to
dissolution, and, having no knowledge or notice of
his want of authority, the
fact of his want of authority has not been advertised in the
manner provided for advertising the fact of dissolution in
the first
paragraph No. 2(b).
Nothing in this article shall affect the liability under
Article 1825 of any person who after dissolution represents
himself or consents to another
representing him as a partner in a partnership engaged
in carrying on business.
When Firm Is Bound or Not Bound :This Article speaks of two

possibilities:
(a) when the partnership is bound to strangers;
(b) when the partnership is not bound to strangers.
When Partnership Is BOUND (a partnership liability is created)

(a) business is for WINDING UP
(b) business is to complete unfinished transactions
(c) COMPLETELY NEW BUSINESS with third parties considered innocent.
[NOTE: The differences between (a) and (b), No. 2 of the
1st paragraph are these: In (a), the customer had
previously extended
credit, that is, was a previous creditor. In case of
dissolution he deserves to ACTUALLY KNOW. In (b), he was
not a previous
creditor. Here, if there was publication of the dissolution, it
is presumed he already knows, regardless of actual
knowledge or
non- knowledge.
When Is the FIRM Not BOUND?

(a) in all cases not included in our answer in
COMMENT No. 2 of this article.
Example: new business with 3rd parties who are in BAD FAITH,
as already explained.
(b) where the firm was dissolved because it was UNLAWFUL to
carry on the business (as when its objects were later
declared by law
to be outside the commerce of man)
EXCEPT — when the act is for WINDING UP
(c) where the partner that acted in the transaction has become
INSOLVENT
(d) where the partner is UNAUTHORIZED to wind up
EXCEPT — if the transaction is with a customer in good
faith (as already defined or explained).
It is understood that if after dissolution a stranger will
represent himself as a partner although he is not
one, he will be a partner
by estoppel. (See Art. 1825 and comments thereon).
Art. 1835. The dissolution of the partnership does not of itself

discharge the existing liability of any partner.
A partner is discharged from any existing liability upon
dissolution of the partnership by an agreement to that effect
between himself, the
partnership creditor and the person or partnership continuing the
business; and such agreement may be inferred from the course
of dealing
between the creditor having knowledge of the dissolution and
the person or partnership continuing the business.
The individual property of a deceased partner shall be liable
for all obligations of the partnership incurred while he was
a partner, but subject
to the prior payment of his separate debts.
Dissolution Ordinarily Does Not Discharge Existing Liability of

Partners
Just because the firm is dissolved does not automatically mean
that the existing liability of any partner is discharged.
Reason: Otherwise, creditors would be prejudiced, particularly if
a partner will just withdraw anytime from the firm.
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How a Partner’s Liability is Discharged

There must be an agreement. The following must agree:
(a) the partner concerned;
(b) the other partners;
(c) the creditors.
NOTE: If there be a novation of the old partnership debts,

and such novation is done after one of the partners has
retired, and without the
consent of such retired partner, said partner cannot be
held liable by creditors who made the novation with
knowledge of the firm’s
dissolution.
Effect of Death on Pending Action

An action for accounting against a managing partner should
be discontinued if he dies during the pendency of
the action. The suit must be
conducted in the settlement proceedings of the deceased’s estate,
particularly if this is the desire of his
administrator.
Art. 1836. Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal representative
of the last
surviving partner, not insolvent, has the right to wind up the
partnership affairs, provided, however, that any partner, his
legal representative
or his assignee, upon cause shown, may obtain winding up
by the court.
Extrajudicial and Judicial Winding-Up

(a) Extrajudicially —
1) by the partners who have not wrongfully dissolved the

partnership
2) or by the legal representative of the last surviving
partner (when all the partners are already dead),
provided the last survivor
was not insolvent.
NOTE: Where the managing partners of the partnership has the
necessary authority to liquidate its affairs under its
article of copartnership, he may sell the partnership
properties even AFTER the life of the partnership has already
expired since he as manager,
is empowered to wind up the business affairs of the
partnership.
(b) Judicially — Under the control and direction of the court,
upon proper cause that is shown to the court.
NOTE: Here the person to wind up must be appointed by the
court. And said appointee should not be the legal
representative of a
deceased partner but should be instead a surviving
partner.
NOTE: The petition, however, for a judicial winding up can
be done by any partner, his legal representative, or his
assignee. (Art.
1836, 2nd part)
Rule if Survivor Is Not the Manager - If the surviving

member of the firm is not the general manager or
administrator thereof, he is NOT
required to serve as liquidator thereof without compensation.
If he liquidates the affairs upon promise of a
certain compensation by the
managing partners, he is naturally entitled to receive
compensation.
Profits - Profits are supposed to accrue only during

the existence of the partnership before dissolution. Of
course, profits that will actually
enter the firm after dissolution as a consequence of transactions
already made before dissolution are included because they
are considered
as profits existing AT THE TIME OF DISSOLUTION. Any other
income earned after the time, like interest or dividends
on stock owned by
the partners or partnership at the time of dissolution should
not be distributed as profits (hence, the agreement here
as to the distribution
of “profits” will not govern), but as merely additional income
to the capital (to be distributed under the rules on co-
ownership, that is, to
be divided in proportion to the amount of capital
given).
NOTE: Said “capital given” is computed as to the time of

dissolution, that is, after profits and losses have
already been computed
NOTE: Indeed said income is not considered as “profits”
for after dissolution, the firm has ceased to continue
the business of the
partners together.
Art. 1837. When dissolution is caused in any way, except in

contravention of the partnership agreement, each partner, as
against his copartners and all persons claiming through
them in respect of their interests in the partnership,
unless otherwise agreed, may have the
partnership property applied to discharge its liabilities, and
the surplus applied to pay in cash the net amount
owing to the respective
partners. But if dissolution is caused by expulsion of a
partner, bona fide under the partnership agreement and if the
expelled partner is
discharged from all partnership liabilities, either by payment
or agreement under the second paragraph of Article 1835,
he shall receive in
cash only the net amount due him from the partnership.
When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as
follows:
(1) Each partner who has not caused dissolution wrongfully shall
have:
(a) All the rights specified in the first paragraph of this

article, and
(b) The right, as against each partner who has caused

the dissolution wrongfully, to damages for breach of the
agreement.
(2) The partners who have not caused the dissolution wrongfully,
if they all desire to continue the business in the
same name either by
themselves or jointly with others, may do so, during the
agreed term for the partnership and for that purpose may
possess the partnership
property, provided they secure the payment by bond approved
by the court, or pay to any partner who has caused
the dissolution
wrongfully, the value of his interest in the partnership at the
dissolution, less any damages recoverable under the second
paragraph, No.
1(b) of this article, and in like manner indemnify him
against all present or future partnership liabilities.
(3) A partner who has caused the dissolution wrongfully
shall have:
(a) If the business is not continued under the provisions
of the second paragraph, No. 2, all the rights of
a partner under the first
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ATTY. BATUNGBAKAL
paragraph, subject to liability for damages in the second

paragraph, No. 1(b), of this article.
(b) If the business is continued under the second paragraph,
No. 2, of this article, the right as against his co-
partners and all claiming
through them in respect of their interests in the partnership,
to have the value of his interest in the partnership,
less any damage
caused to his co-partners by the dissolution, ascertained and
paid to him in cash, or the payment secured by a
bond approved by the
court, and to be released from all existing liabilities of
the partnership; but in ascertaining the value of the
partner’s interest the
value of the goodwill of the business shall not be considered.
Two Aspects of Causes of Dissolution

Dissolution may be caused:
(a) although the partnership contract is NOT VIOLATED
(Example: death, or arrival of term) (The rights of
partners are governed by the FIRST PARAGRAPH of this
article.)
(b) because the partnership contract is VIOLATED
Example: Deliberate withdrawal of a partner although the
period of the firm has not yet expired, thus causing
damage to the firm.
(NOTE: The rights of the partners here are governed BUT
the SECOND PARAGRAPH of this article.)
Better Rights for Innocent Partners - Note that innocent

partners have better rights than guilty partners, and
that the latter are required
to indemnify for the damages caused.
Right of Innocent Partners to Continue - Note also that the

innocent partners may continue the business (but this time,
there is really a
NEW partnership). They can even use the same firm name if they
wish to; moreover, they can ask new members to join, BUT
always, the
rights granted to the guilty partners are safeguarded by:
(a) a BOND approved by the court;
(b) a PAYMENT of his interest at the time of dissolution
MINUS damages. (Moreover, the guilty partner who is
excluded will be
indemnified against all PRESENT or FUTURE partnership liabilities.
This is because he is no longer a partner.)
Right to Get Cash

In case of non-continuance of the business, the interest of
the partner should, if he desires, be given in CASH.
(Firm assets may be sold for
this purpose.)
[NOTE: “The right given to each partner, where no agreement to
the contrary has been made to have his share of the
surplus paid to him in
CASH makes certain an existing (under the old law) uncertainty.
At present (under the old law) it is not certain
whether a partner may or
may not insist on a physical partition of the property
remaining after third persons have been paid.
No Share in Goodwill for Guilty Partner

A guilty partner, in ascertaining the value of his
interest is NOT entitled to a proportionate share of
the value of the GOODWILL. (This is a
necessary consequence of his bad faith.)
NOTE: The deprivation of his share in the goodwill is not
unconstitutional, and cannot be considered as unlawful taking
of property
without due process of law.
Partner Wrongfully Excluded

When a partner is excluded wrongfully, he should be
considered as the innocent partner, and the others as
the guilty partners. It is now
said that other partners “must account not only for what is due
to him at the date of the dissolution but also for
damages or for his share of
the profits realized from the appropriation of the partnership
business and good will. (Of course), it is otherwise if
the excluded partner
had substantially broken the partnership agreement.”
Division of Losses
Although such things as “depreciation, obsolescence, or
diminished market value of capital assets” are not
strictly speaking to be
considered losses because they merely constitute a decrease
in capital assets (and not the result of business
transactions), still they should,
in fairness be considered as losses, and the rules on losses
must apply, provided that their real market values at
the time of liquidation are
the values considered.
Art. 1838. Where a partnership contract is rescinded on the ground

of the fraud or misrepresentation of one of the parties
thereto, the party
entitled to rescind is, without prejudice to any other right,
entitled:
(1) To a lien on, or right of retention of, the surplus
of the partnership property after satisfying the partnership
liabilities to third persons for
any sum of money paid by him for the purchase of an
interest in the partnership and for any capital or
advances contributed by him;
(2) To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership
for any payments made by
him in respect of the partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud
or making the representation against all debts and
liabilities of the partnership.
Rescission or annulment of Partnership Contract

(a) Although the law here uses the term “rescind,” the proper
technical term that should have been used is “annulled,” in
view of the “fraud
or misrepresentation.”
(b) The “fraud or misrepresentation” here vitiates the
consent whereby the contract of partnership had been
entered into, hence, it is
really “dolo causante.”
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Three Rights : The Article speaks of 3 rights

(without prejudice to his other rights under other legal
provisions):
(a) right of LIEN or RETENTION
(b) right of SUBROGATION
(c) right of INDEMNIFICATION
Art. 1839. In settling accounts between the partners after

dissolution, the following rules shall be observed, subject
to any agreement to the
contrary:
(1) The assets of the partnership are:
(a) The partnership property;
(b) The contributions of the partners necessary the payment

of all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in order of
payment, as follows:
(a) Those owing to creditors other than partners;
(b) Those owing to partners other than for capital and profits;
(c) Those owing to partners in respect of capital;
(d) Those owing to partners in respect of profits.

(3) The assets shall be applied in the order of their
declaration in No. 1 of this article to the satisfaction
of the liabilities.
(4) The partners shall contribute, as provided by Article 1797,
the amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any per-
son appointed by the court shall have the right to enforce
the contributions specified in
the preceding number.
(6) Any partner or his legal representative shall have the right
to enforce the contributions specified in No. 4, to
the extent of the amount which
he has paid in excess of his share of the liability.
(7) The individual property of a deceased partner shall be
liable for the contributions specified in No. 4.
(8) When partnership property and the individual properties of the
partners are in possession of a court for distribution,
partnership creditors
shall have priority on partnership property and separate creditors
on individual property, saving the rights of lien or
secured creditors.
(9) Where a partner has become insolvent or his estate
is insolvent, the claims against his separate property
shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
Rules for Settling Accounts

(a) Commissioner’s Comment on No. (1) subdivision (b) “the
contributions of the partners necessary for the payment
of all liabilities . . .”
“The adoption of this clause will end the present (under

the old law) confusion as to whether the contribution
of the partners toward the
losses of the partnership are partnership assets or not. The
Commissioners believe that the opinion that such
contributions are assets is
supported by the better reasoning.”
(b) Art. 1839 speaks of the methods of settling the

accounts of the partnership, that is to say — its
LIQUIDATION.
NOTE: Before liquidation is made, no action for accounting of
a partner’s share in the profit or for a return
of his capital assets can
properly be made, since it is essential to first pay-off the
creditors. Thus, a partner who has retired must first ask
for the liquidation before
he can recover his proportionate share of the partnership
assets.
NOTE: The managing partner of a firm is not a debtor
of the other partners for the capital embarked by them
in the business; thus, he can
only be made liable for the capital, when upon liquidation of
the business, there are found to be assets in his hands
applicable to the capital
account.
(c) Art. 1839 can apply only if there is a contrary agreement.

Of course, such agreement cannot prejudice innocent third
parties.
The Assets of the Partnership

(a) The partnership property (including goodwill).
(b) The contributions of the partners, which are made to pay
off the partnership liabilities.
Order of Payment of Firm’s Liabilities

(a) First give to creditors (who are strangers), otherwise they may
be prejudiced.
(b) Then give to partners who are also creditors (they should
be placed in a subordinate position to outside
creditors for otherwise they
may prefer their own interests).
NOTE: Example of credits owing to partners which are neither
capital nor profits, are those for reimbursement of
business
expenses.
(c) Then give to the partners their capital.
NOTE: Capital should be given ahead of profit for it is
only the surplus profit over capital that should be
considered as the gain or
the profit of the firm.)
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NOTE: An industrial partner, who has not contributed money or

property at all is, in the absence of stipulation,
not entitled to
participate in the capital. He shares in the profits,
however.
(d) Lastly, the profits must be distributed.
NOTE: If, during the liquidation of a firm, the profits for
a certain period of time cannot be exactly
determined because no evidence
or insufficient evidence thereof is available, the court should
determine the profit for the period by finding the
average profits
during the period BEFORE and AFTER the period of time
in question.
New Contributions
If the partnership assets are insufficient, the other partners
must contribute more money or property. Who can enforce these
contributions?
(a) In general, any assignee for the benefit of the
creditor; or any person appointed by the court (like a
receiver).
Reason: Said enforced contributions may be considered as
partnership assets, and should therefore be available to
the creditors
(b) Any partner or his legal representative (to the extent
of the amount which he has paid in excess of the
share of the liability). (Art.
1839, No. 1[b]).
Preference With Respect to the Assets - Suppose both the

partnership property and the individual properties of the
partners are in the
possession of the court for distribution, who should be
preferred? It depends:
(a) Regarding partnership property, partnership creditors have preference.
(b) Regarding individual properties of the partners, the individual
creditors are preferred.
Rule if Partner is Insolvent – If a partner is

insolvent, how will his individual properties be distributed?
(a) First, give to the individual or separate creditors.
(b) Then, to the partnership creditors.
(c) Then, those owing to the other partners by way of
contribution.
NOTE: Insolvency here of the partner or his estate does not
necessarily mean no more money or property; it is enough
that the
assets are less than the liabilities.
NOTE: A person who alleges himself to be a partner
of a deceased individual has the right to intervene in
the settlement of the
decedent’s estate, particularly in the approval of the
executor’s or administrator’s account for after all it may
be that he (the alleged
partner) was indeed a partner to whom the deceased
partner owed something. Administrators and executors, instead
of opposing
the intervention of interested parties, should welcome the
participation of the same for their own protection. Of
course, mere
intruders should not be allowed.
Art. 1840. In the following cases creditors of the dissolved

partnership are also creditors of the person or partnership
continuing the
business:
(1) When any new partner is admitted into an existing
partnership, or when any partner retires and assigns
(or the representative of the
deceased partner assigns) his rights in partnership property
to two or more of the partners, or to one or more
of the partners and one or more
third persons, if the business is continued without liquidation
of the partnership affairs;
(2) When all but one partner retire and assign (or the
representative of a deceased partner assigns) their rights
in partnership property to the
remaining partner, who continues the business without liquidation
of partnership affairs, either alone or with others;
(3) When any partner retires or dies and the business of
the dissolved partnership is continued as set forth in Nos.
1 and 2 of this article, with
the consent of the retired partners or the representative
of the deceased partner, but without any assignment of
his right in partnership
property;
(4) When all the partners or their representatives assign their
rights in partnership property to one or more third
persons who promise to pay
the debts and who continue the business of the dissolved
partnership;
(5) When any partner wrongfully causes a dissolution and the
remaining partners continue the business under the provisions
of Article 1837,
second paragraph, No. 2 either alone or with others, and
without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners
continue the business either alone or with others
without liquidation of the
partnership affairs.
The liability of a third person becoming a partner in
the partnership continuing the business, under this article, to
the creditors of the dissolved
partnership shall be satisfied out of the partnership property only,
unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued
under any conditions set forth in this article the creditors
of the dissolved
partnership, as against the separate creditors of the
retiring or deceased partner or the representative of
the deceased partner have a prior
right to any claim of the retired partner or the
representative of the deceased partner against the person
or partnership continuing the
business, on account of the retired or deceased
partner’s interest in the dissolved partnership or on
account of any consideration promised for
such interest or for his right in partnership property.
Nothing in this article shall be held to modify any right
of creditors to set aside any assignment on the ground
of fraud.
The use by the person or partnership continuing the business
of the partnership name, or the name of a deceased
partner as part thereof,
shall not of itself make the individual property of the
deceased partner liable for any debts contracted by such
person or partnership.
Right of Old Creditors to be Creditors of the New Firm

Reason for the law (in making creditors of the dissolved
firm also creditors of the persons or partnership continuing
the business): So that
said creditors will not lose their preferential rights as
creditors to the partnership property.
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Art. 1841. When any partner retires or dies, and the business
is continued under any of the conditions set forth in the
preceding article or in
Article 1837, second paragraph, No. 2, without any settlement
of accounts as between him or his estate and the
person or partnership
continuing the business, unless otherwise agreed, he or his
legal representative as against such person or partnership
may have the value of his
interest at the date of dissolution ascertained, and shall
receive as an ordinary creditor an amount equal to
the value of his interest in the
dissolved partnership with interest, or, at his option or at
the option of his legal representative, in lieu of
interests the profits attributable to
the use of his right in the property of the dissolved
partnership; provided that the creditors of the dissolved
partnership as against the separate
creditors, or the representative of the retired or deceased
partner shall have priority on any claim arising under this
article as provided by
Article 1840, third paragraph.
Retirement or Death of a Partner

(a) This Article speaks of the rights of retiring
partners or of the estate of a deceased partner
when the business is continued without any
statement of accounts.
(b) As a general rule when a partner retires from the
firm, he is entitled to the payment of what may be
due him after a liquidation. But no
liquidation is needed when there already is a settlement as
to what the retiring partner shall receive.
Art. 1842. The right to an account of his interest shall accrue

to any partner, or his legal representative as against
the winding up partners
or the surviving partners or the person or partnership
continuing the business, at the date of dissolution, in
the absence of any agreement
to the contrary.
When Right to Account Accrues

(a) See Arts. 1807 and 1809 which also deal with the duty to
account. Under the present Article (1842), the right to
demand the account
accrues at the date of dissolution in the absence of any
contrary agreement.
(b) Note that the legal representative of a partner is also,
under Art. 1842, entitled to the accounting.
Possible Defendants - The action can be against:
(a) the winding up partners;
(b) the surviving partners;
(c) the person or partnership continuing the business.
CHAPTER 4: LIMITED PARTNERSHIP

Art. 1843. A limited partnership is one formed by two or
more persons under the provisions of the following article,
having as members one or
more general partners and one or more limited partners. The
limited partners as such shall not be bound by the
obligations of the partnership.
Art. 1844. Two or more persons desiring to form a limited

partnership shall:
(1) Sign and swear to a certificate which shall state —
(a) The name of the partnership, adding thereto the word
“Limited”;
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each member, general
and limited partners being respectively designated;
(e) The term for which the partnership is to exist;
(f) The amount of cash and a description of and the agreed
value of the other property contributed by each limited
partner;
(g) The additional contributions, if any, to be made by each
limited partner and the times at which or events on
the happening of which
they shall be made;
(h) The time, if agreed upon, when the contribution of each
limited partner is to be returned;
(i) The share of the profits or the other compensation by
way of income which each limited partner shall receive
by reason of his
contribution;
(j) The right, if given, of a limited partner to
substitute an assignee as contributor in his place, and
the terms and conditions of the
substitution;
(k) The right, if given, of the partners to admit
additional limited partners;
(l) The right, if given, of one or more of the lim-
ited partners to priority over other limited partners, as
to contributions or as to
compensation by way of income, and the nature of such
priority;
(m) The right, if given, of the remaining general
partner or partners to continue the business on the
death, retirement, civil interdiction,
insanity or insolvency of a general partner; and
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(n) The right, if given, of a limited partner to

demand and receive property other than cash in return
for his contribution.
(2) File for record the certificate in the Office of the
Securities and Exchange Commission.
A limited partnership is formed if there has been substantial
compliance in good faith with the foregoing requirements.
Requisites in the Formation of a Limited Partnership

Two important things are needed:
(a) The signing under oath of the required certificate (with all
the enumerated items), and
(b) The filing for record of the certificate in the Office
of the Securities and Exchange Commission.
Non-Fulfillment of the Requisites - If the proposed limited

partnership has not conformed substantially with the requirements
of this
article, as when the name of not one of the general
partners appear in the firm name, it is not considered
a limited partnership but a
general partnership. This is because a firm transacting
business as a partnership is presumed to be a
general partnership.
Effect if Only Aggregate Contribution Is Stated -The law

says that the contribution of each limited partner must
be stated. Therefore if
the aggregate sum given by two or more limited partners is
given, the law has not been complied with.
Effect of Omitting the Term “Limited” in the Firm Name -

The law requires the firm name to have the word “Limited.”
If this provision
is violated, the name cannot be considered the firm name of
a limited partnership.
Art. 1845. The contributions of a limited partner may be

cash or other property, but not services.
What the Limited Partner Can Contribute - Note that a

limited partner is not allowed to contribute industry
or services alone.
Industrial Partner Can Join - An industrial partner can become
a general partner in a limited partnership, for
the article speaks only of a
“limited partner.”
Art. 1846. The surname of a limited partner shall not appear

in the partnership name unless:
(1) It is also the surname of a general partner, or
(2) Prior to the time when the limited partner became such,
the business had been carried on under a name in which
his surname appeared.
A limited partner whose surname appears in a partner-
ship name contrary to the provisions of the first paragraph
is liable as a general
partner to partnership creditors who extend credit to the
partnership without actual knowledge that he is not a
general partner.
Non-Inclusion of Name of the Limited Partner -Note that a

limited partner violating this article is liable as
a general partner to innocent
third parties, without however the rights of a general
partner.
Art. 1847. If the certificate contains a false statement, one who

suffers loss by reliance on such statement may hold liable
any party to the
certificate who knew the statement to be false:
(1) At the time he signed the certificate, or
(2) Subsequently, but within a sufficient time before the
statement was relied upon to enable him to cancel
or amend the certificate, or to file a
petition for its cancellation or amendment as provided in
Article 1865.
Liability for a False Statement - This speaks of liability

for a false statement. The person who suffers loss can
sue for damages
Art. 1848. A limited partner shall not become liable as

a general partner unless, in addition to the
exercise of his rights and powers as a limited
partner, he takes part in the control of the business.
Effect of Taking Part in the Control of the Business

(a) The following acts do not constitute taking “part in the
control of the business”:
1) mere dealing with a customer.
2) mere consultation on one occasion with the general

partners.
(b) The following have been held to constitute taking “part in
the control of the business”:
1) selection of who will be the managing partners.
2) supervision over a superintendent of the business of the

firm.
(c) Participation in the control of the business makes the
limited partner liable as a general partner
without however getting the latter’s
rights.
Art. 1849. After the formation of a limited partnership,
additional limited partners may be admitted upon filing
an amendment to the original
certificate in accordance with the requirements of Article 1865.
When Additional Limited Partners May Be Admitted - Note that

even after a limited partnership has already been formed,
the firm may
still admit new limited partners, provided there is a proper
amendment to the certificate.
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Effect of Failure to Amend - If additional limited

partners are taken in, without proper amendment of
certificate with the SEC, this does
not necessarily mean the dissolution of the limited partnership.
Art. 1850. A general partner shall have all the rights and
powers and be subject to all the restrictions and
liabilities of a partner in a
partnership without limited partners. However, without the
written consent or ratification of the specific act
by all the limited partners, a
general partner or all of the general partner’s have no
authority to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights in
specific partnership property, for other than a partnership
purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless the
right so to do is given in the certificate;
(7) Continue the business with partnership property on the death,
retirement, insanity, civil interdiction or insolvency of
a general
partner, unless the right so to do is given in the
certificate.
Acts of Strict Dominion - Note that as a rule, in the

instances enumerated, the general partners (even if already
unanimous among
themselves) must still get the written CONSENT or RATIFICATION
of ALL the limited partners.
Reason: In a sense the acts are acts of strict dominion
or ownership, and are not generally essential for the
routine or ordinary conduct of
the firm’s business.
Conflicts Rule Governing Capacity of the Limited Partner -

If a general partner in a limited partnership goes
abroad, his capacity to
bind the firm is governed by the law of the place where the
limited partnership was formed.
Art. 1851. A limited partner shall have the same rights as

a general partner to:
(1) Have the partnership books kept at the principal place of
business of the partnership, and at a reasonable hour
to inspect and copy any of
them;
(2) Have on demand true and full information of all things
affecting the partnership, and a formal account of
partnership affairs whenever
circumstances render it just and reasonable; and
(3) Have dissolution and winding up by decree of court.
A limited partner shall have the right to receive a share
of the profits or other compensation by way of
income, and to the return of his
contribution as provided in Articles 1856 and 1857.
Rights of a Limited Partner

(a) A limited partner necessarily has lesser rights than
a general partner. These rights are enumerated in the
Article.
(b) Note however that among other things he also has the right
to have dissolution and winding up by decree of the
court.
(c) He cannot however bind the firm by a contract.
Art. 1852. Without prejudice to the provisions of article 1848,

a person who has contributed to the capital of a
business conducted by a person
or partnership erroneously believing that he has become a
limited partner in a limited partnership, is not
by reason of his exercise of the rights
of a limited partner, a general partner with the person
or in the partnership carrying on the business, or bound
by the obligations of such
person or partnership, provided that on ascertaining the
mistake he promptly renounces his interest in the
profits of the business, or other
compensation by way of income.
Contributor Who Erroneously Believes He Has Become a Limited

Partner
Example:
A, B, C, D, and E agreed to form a limited
partnership, with the first two as general partners and
the rest as limited partners, but as
recorded in the Securities and Exchange Commission and in the
certificate, A and B were really named general
partners, but only C and D
were included as limited (special) partners. E, who had
contributed money, was LEFT OUT. If E erroneously believes
that he has become a
limited partner (erroneously, for clearly, he is not) and
thereupon exercises the rights of a limited partner,
he should not generally be
considered as liable as a general partner (general
because the public cannot be blamed for not
considering him a limited partner).
When He Becomes Liable As a General Partner - In

the example given, however, he can still be liable
as a general partner:
(a) unless on ascertaining the mistake, he promptly
renounces his interest in the profits of the business,
or other compensation by way of
income; or
(b) unless, even if no such renouncing is made, partnership
creditors are NOT prejudiced.
Limited Partner Who Participates in the Control Cannot

Take Advantage of the Article
The person referred to under Art. 1848 cannot take advantage,
naturally, of Art. 1852.
Art. 1853. A person may be a general partner and a

limited partner in the same partnership at the same time,
provided that this fact shall be
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stated in the certificate provided for in Article 1844.

A person who is a general, and also at the same time
a limited partner, shall have all the rights and powers
and be subject to all the restrictions
of a general partner; except that, in respect to his
contribution, he shall have the rights against the other
members which he would have had if
he were not also a general partner.
General — Limited Partner - Note that a person may

be a general and a limited partner at the same
time, provided same is stated in the
certificate.
Rights - Generally, his rights are those of a general

partner (hence, third parties can go against his
individual properties).
EXPN: Regarding his contribution (like the right to have it
returned on proper occasions) he would be considered a
limited partner, with
rights of a limited partner, insofar as the other
partners are concerned.
Art. 1854. A limited partner also may loan money to and

transact other business with the partnership, and, unless
he is also a general partner,
receive on account of resulting claims against the
partnership, with general creditors, a pro rata share of
the assets. No limited partner shall in
respect to any such claim:
(1) Receive or hold as collateral security any partnership
property, or
(2) Receive from a general partner or the partnership any
payment, conveyance, or release from liability, if at the
time the assets of the
partnership are not sufficient to discharge partnership liabilities to
persons not claiming as general or limited partners.
The receiving of collateral security, or payment, conveyance, or
release in violation of the foregoing provisions is a
fraud on the creditors of the
partnership.
Right of a Limited Partner to Lend Money and Transact Other

Business With the Firm
(a) Note that 3rd parties are always given preferential rights
insofar as the firm’s assets are concerned.
(b) Note also that while the limited partner, in the case of
a claim referred to in the article, is prohibited to
“receive or hold as
COLLATERAL SECURITY any partnership property,” still he if not
prohibited to purchase partnership assets which are used to
satisfy
partnership obligations towards third parties.
Art. 1855. Where there are several limited partners the members
may agree that one or more of the limited partners shall
have a priority over
other limited partners as to the return of their
contributions, as to their compensation by way of
income, or as to any other matter. If such an
agreement is made it shall be stated in the certificate,
and in the absence of such a statement all the
limited partners shall stand upon equal
footing.
Preference to Some Limited Partners

(a) Note that preference can be given to some limited partners
over the other limited partners.
(b) However, the preference must be “stated in the
certificate.”
Nature of the Preference - This preference may involve:

(a) the return of contributions;
(b) compensation;
(c) other matters.
Art. 1856. A limited partner may receive from the partnership

the share of the profits or the compensation by way
of income stipulated for in
the certificate; provided, that after such payment is made,
whether from the property of the partnership or that of
a general partner, the
partnership assets are in excess of all liabilities of
the partnership except liabilities to limited partners on
account of their contributions and
to general partners.
Profit or Compensation of Limited Partners
(a) Whereas Art. 1856 speaks of “profit or compensation
by way of income,” Art. 1857 deals generally with the return
of the contributions.
(b) Note that for Art. 1856 to apply, partnership assets must
be in excess of partnership liabilities to 3rd persons,
not liabilities to partners.
Art. 1857. A limited partner shall not receive from a

general partner or out of partnership property any part
of his contributions until:
(1) All liabilities of the partnership, except liabilities to
general partners and to limited partners on account
of their contributions, have
been paid or there remains property of the partnership sufficient
to pay them;
(2) The consent of all members is had, unless the re-
turn of the contribution may be rightfully demanded under
the provisions of the
second paragraph; and
(3) The certificate is canceled or so amended as to set

forth the withdrawal or reduction.
Subject to the provisions of the first paragraph, a limited
partner may rightfully demand the return of his
contribution:
(1) On the dissolution of a partnership, or
(2) When the date specified in the certificate for its return
has arrived, or
(3) After he has given a month’s notice in writing to
all other members, if no time is specified in the
certificate, either for the return of
the contribution or for the dissolution of the partnership.
In the absence of any statement in the certificate to the
contrary or the consent of all members, a limited
partner, irrespective of the nature of
his contribution has only the right to demand and receive
cash in return for his contribution.
A limited partner may have the partnership dissolved and its
affairs wound up when:
(1) He rightfully but unsuccessfully demands the return of

his contribution, or
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(2) The other liabilities of the partnership have not been paid, or
the partnership property is insufficient for their payment
as required
by the first paragraph, No. 1, and the limited partner would
otherwise be entitled to the return of his
contribution.
When Contributions of Limited Partners Can Be Returned

(a) The 1st paragraph deals with the CONDITIONS that must exist before
contributions (or part thereof) by a limited partner
can be
returned to him.
(b) The second paragraph deals with the TIME when such
contributions can be returned, provided that the conditions
are complied with.
(c) Note that as a rule, even if a limited partner has
contributed property, he has the right to demand and
receive CASH in return.
(d) If paragraph one is violated, previous creditors can sue,
but they must allege and prove the non-existence of the
CONDITIONS. Among
these in the same category as previous creditor is the
assignee in insolvency of a bankrupt limited partnership
Liability of a Limited Partner Who Has Withdrawn -

Suppose a limited partner withdraws rightfully his
contribution (all conditions
being fulfilled, particularly the complete solvency of the firm
as of the time of withdrawal) and the certificate is
amended properly, would
he still be liable to previous creditors if later on the
firm becomes insolvent?
ANS.: Yes, if by chance, the very next day the partnership
assets are all destroyed by an earthquake, etc., it is
unfair for him to keep the
cash, and leave the creditors with nothing. His contribution (even
if already returned to him) is to be treated as
a trust fund for the
discharge of liabilities. Moreover, the sum should include
the interest presumably earned.
NOTE: Future creditors cannot make use of the principle
enunciated in the above-cited case in view of the recorded
amended certificate,
except of course if the money had been wrongfully returned
to the limited partner. (See Art. 1858)
Art. 1858. A limited partner is liable to the partnership:

(1) For the difference between his contribution as actually
made and that stated in the certificate as having been
made, and
(2) For any unpaid contribution which he agreed in the
certificate to make in the future at the time and on
the conditions stated in the
certificate.
A limited partner holds as trustee for the partnership:

(1) Specific property stated in the certificate as con-
tributed by him, but which was not contributed or which has
been wrongfully
returned, and
(2) Money or other property wrongfully paid or conveyed to him

on account of his contribution.
The liabilities of a limited partner as set forth in this
article can be waived or compromised only by the
consent of all members; but a waiver or
compromise shall not affect the right of a creditor of a
partnership who extended credit or whose claim arose after the
filing and before a
cancellation or amendment of the certificate, to enforce
such liabilities.
When a contributor has rightfully received the return in whole
or in part of the capital of his contribution, he
is nevertheless liable to the
partnership for any sum, not in excess of such return with
interest, necessary to discharge its liabilities to all
creditors who extended credit or
whose claims arose before such return.
Liabilities of a Limited Partner - This is a new

provision of the new Civil Code.
Example: A and B are limited partners of a partnership.
In the certificate, it was stated that A contributed
P1.8M when as a matter of fact he
had given only P1.5 million. In the certificate too is a
promise made by B to pay P200,000 additional contribution
on Dec. 1, 2004. Should A
and B make good the P300,000 and P200,000 respectively? ANS.:
Yes, A should pay now; B on Dec. 1, 2004.
May the liabilities in the preceding problem be waived or

compromised? ANS.: Yes, but two conditions must be followed:
(a) All the other partners must agree.
(b) Innocent third party creditors must not be prejudiced.
They are innocent when their claim for extension of credit
was before the
cancellation or amendment of the certificate.
Problem Involving Liability to Creditors

A, a limited partner, received the return of his
contribution on the date stated in the certificate.
It was discovered that the remaining assets
were insufficient to pay two creditors, X and Y. X’s claim
arose before the return; Y’s claim arose after the return.
Should A be compelled to
give back what he had received?
ANS.: I distinguish:
(a) X’s claim should be satisfied out of what has been
returned to A.
Reason: X’s claim arose before the return. If there is a
balance, it should be returned to A. If there is
a deficit, A is not liable for this because
he is only a limited partner.
(b) Y’s claim does not have to be satisfied from what has been
returned to A as contribution.
Reason: His claim arose after the return. Y’s claim should be
directed against the general partners.
Art. 1859. A limited partner’s interest is assignable.

A substituted limited partner is a person admitted to
all the rights of a limited partner who has died
or has assigned his interest in a
partnership.
An assignee, who does not become a substituted limited
partner, has no right to require any information or
account of the partnership
transaction or to inspect the partnership books; he is only
entitled to receive the share of the profits or other
compensation by way of income,
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or the return of his contribution, to which his assignor

would otherwise be entitled.
An assignee shall have the right to become a substituted
limited partner if all the members consent thereto
or if the assignor, being thereunto
empowered by the certificate, gives the assignee that right.
An assignee becomes a substituted limited partner when the
certificate is appropriately amended in accordance with
Article 1865.
The substituted limited partner has all the rights and

powers, and is subject to all the restrictions and
liabilities of his assignor, except those
liabilities of which he was ignorant at the time he became
a limited partner and which could not be ascertained from
the certificate.
The substitution of the assignee as a limited partner
does not release the assignor from liability to the
partnership under Articles 1847 and
1858.
Assignment of a Limited Partner’s Interest

- May the interest of a limited partner be assigned?
ANS.: Yes. (Par. 1, Art. 1859).
- Does the assignee of the interest of the limited
partner become necessarily a substitute partner? ANS.: No.
1) In some cases, he becomes one.
2) In others, he remains a mere assignee.
Substituted Limited Partner - He is a person admitted

to all the rights of a limited partner who has
died or has assigned his interest in a
partnership. (2nd par., Art. 1859, Civil Code).
Art. 1860. The retirement, death, insolvency, insanity or civil

interdiction of a general partner dissolves the
partnership, unless the business is
continued by the remaining general partners:
(1) Under a right so to do stated in the certificate,
or
(2) With the consent of all members.
Some Causes for the Dissolution of a Limited Partnership -

Keyword: DRICI (death, retirement, insolvency, civil interdiction,
insanity of
a GENERAL partner)
NOTE: The instances set forth in Art. 1860 (retirement, etc.) do
not apply in the case of the limited partner, for in
such a case, the firm is
not dissolved.
Art. 1861. On the death of a limited partner his executor
or administrator shall have the rights of a limited
partner for the purpose of settling
his estate and such power as the deceased had to constitute
his assignee a substituted limited partner.
The estate of a deceased limited partner shall be liable
for all his liabilities as a limited partner.
Death of Limited Partner- A, a limited partner, was

given the right to constitute his assignee as a substituted
limited partner. On his
death, may his administrator do the same?
ANS.: Yes. Furthermore, said administrator shall have all the rights
of a limited partner for the purpose of settling
the estate of the
deceased.
Art. 1862. On due application to a court of competent jurisdiction

by any creditor of a limited partner, the court may
charge the interest of the
indebted limited partner with payment of the unsatisfied amount
of such claim, and may appoint a receiver, and make
all other orders,
directions, and inquiries which the circumstances of the case may
require.
The interest may be redeemed with the separate property of
any general partner, but may not be redeemed with
partnership property.
The remedies conferred by the first paragraph shall not be deemed
exclusive of others which may exist.
Nothing in this Chapter shall be held to deprive a
limited partner of his statutory exemption.
Example - A is a limited partner who is indebted

to X. X applies to the court to charge the
interest of A in the partnership. May the interest
charged be redeemed by partnership property?
ANS.: No. The law says that the interest may be redeemed
with the separate property of any general partner, but
cannot be redeemed
with partnership property.
Art. 1863. In settling accounts after dissolution the liabilities

of the partnership shall be entitled to payment in the
following order:
(1) Those to creditors, in the order of priority as provided
by law except those to limited partners on account
of their contributions, and to
general partners;
(2) Those to limited partners in respect to their share of
the profits and other compensation by way of income
on their contributions;
(3) Those to limited partners in respect to the capital
of their contributions;
(4) Those to general partners other than to capital and
profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subsequent
agreement, limited partners share in the partnership assets
in respect to their
claims for capital, and in respect to their claims for
profits or for compensation by way of income on
their contribution respectively, in
proportion to the respective amounts of such claims.
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Payment of Liabilities of the Limited Partnership: Note that

profits are given priority over capital
Art. 1864. The certificate shall be cancelled when the partnership is

dissolved or all limited partners cease to be such.
A certificate shall be amended when:
(1) There is a change in the name of the partnership or
in the amount or character of the contribution of
any limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
(5) A general partner retires, dies, becomes insolvent or
insane, or is sentenced to civil interdiction and the
business is continued under Article
1860;
(6) There is a change in the character of the business
of the partnership;
(7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the
certificate for the dissolution of the partnership or for the
return of a contribution;
(9) A time is fixed for the dissolution of the partnership,
or the return of a contribution, no time having
been specified in the certificate; or
(10) The members desire to make a change in any other
statement in the certificate in order that it shall accurately
represent the agreement
among them.
Cancellation - When the partnership is dissolved, or when all

the limited partners cease to be limited partners, the
certificate shall be
cancelled, not merely amended. This is obvious for if there
be no more limited partners, the limited partnership cannot
exist as such. The
writing to cancel a certificate shall be signed by all
members. (Art. 1865, 2nd par.).
Art. 1865. The writing to amend a certificate shall:

(1) Conform to the requirement of article 1844 as far as
necessary to set forth clearly the change in the
certificate which it is desired to
make; and
(2) Be signed and sworn to by all members, and an
amendment substituting limited partner or adding a
limited or general partner shall
be signed also by the member to be substituted or added,
and when a limited partner is to be substituted,
the amendment shall also be
signed by the assigning limited partner.
The writing to cancel a certificate shall be signed by
all members.
A person desiring the cancellation or amendment of a
certificate, if any person designated in the first and
second paragraphs as a person who
must execute the writing refuses to do so, may petition
the court to order a cancellation or amendment thereof.
If the court finds that the petitioner has a right to have the
writing executed by a person who refuses to do
so, it shall order the Office of the
Securities and Exchange Commission where the certificate is recorded,
to record the cancellation or amendment of the
certificate, and when
the certificate is to be amended, the court shall also cause to
be filed for record in said office a certified copy
of its decree setting forth the
amendment.
A certificate is amended or cancelled when there is filed for
record in the Office of the Securities and Exchange
Commission, where the
certificate is recorded:
(1) A writing in accordance with the provisions of the first

or second paragraph; or
(2) A certified copy of the order of court in accordance with

the provisions of the fourth paragraph;
(3) After the certificate is duly amended in accordance with this
article, the amended certificate shall thereafter be for all
purposes the
certificate provided for in this Chapter.
Art. 1866. A contributor, unless he is a general

partner, is not a proper party to proceeding by or
against a partnership, except where the object
is to enforce a limited partner’s right against or
liability to the partnership.
Art. 1867. A limited partnership formed under the law prior to

the effectivity of this Code, may become a limited
partnership under this
Chapter by complying with the provisions of Article 1844,
provided the certificate sets forth:
(1) The amount of the original contribution of each
limited partner, and the time when the contribution was
made; and
(2) That the property of the partnership exceeds the amount
sufficient to discharge its liabilities to persons not
claiming as general or limited
partners by an amount greater than the sum of the
contributions of its limited partners.
A limited partnership formed under the law prior to the
effectivity of this Code, until or unless it becomes a
limited partnership under this
Chapter, shall continue to be governed by the provisions of
the old law.
Transitional Provisions on Limited Partnerships

Q: On June 1, 1946, a limited partnership was formed. May
it become a limited partnership under the new Civil Code?
ANS.: Yes, by following the conditions in Art. 1867.
Suppose the limited partnership in question above does not want
to become one under the new Civil Code, what laws will govern
said
partnership? ANS.: The old law.
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ATTY. BATUNGBAKAL
TITLE X AGENCY: Chapter 1 NATURE, FORM, AND KINDS OF AGENCY
Art. 1868. By the contract of agency a person binds

himself to render some service or to do something
in representation or on behalf of
another, with the consent or authority of the latter.
Defective Definition of the Contract of Agency: The

definition of AGENCY given in Art. 1868 is very broad,
and therefore, defective.
(a) As worded, the definition includes the relationship of
master and servant, of employer and employee, of lessor
and independent
contractor. The servant, the employee, and the independent contractor
all render some work or service in representation or
on behalf of
another.
NOTE: What the agent really does for the principal is a
JURIDICAL ACT, and not merely a material one. In other
words, while an
agent may exercise discretionary powers, the lessee of
services ordinarily performs only ministerial functions.)
(b) As worded, it would seem that the agent must always
expressly represent the principal. This is not necessarily so,
for sometimes an
agent does not disclose his principal; he may even act in behalf
of himself, but here the principal would still be BOUND “when
the contract
involves things BELONGING to the principal.” (Art. 1883, 2nd par.,
Civil Code
Other Definitions
(a) “An agency may be defined as a contract either
express or implied upon a consideration, or a
gratuitous undertaking, by which one of
the parties confides to the other, the management of some
business to be transacted in his name or on his
account, and by which that other
assumes to do the business and renders an account of
it.”
(b) “Agency is the relationship which results from the
manifestation of consent by one person to another
that the other shall act on his
behalf and subject to his control, and consented by the
other so to act.” (Restatement of the Law of Agency,
Sec. 1).
(c) “Agency is an act which one person gives to another
the power to do something for the principal and in his
name.” (French Civil Code).
Roman Law: In Roman Law, there was the contract of mandatum where
one person called mandans authorized another called
the
mandatarius to do something for him. This originated from the
obligation or right of a son or a slave to represent
the pater familias.
(NOTE: In Spanish, the principal is called mandante, while

the agent is referred to as the mandatario. The contract
itself is a mandato.)
Importance of Agency :It enables a man to increase the

range of his individual and corporate activity by enabling
him to be constructively
present in many places and to carry on diverse activities
at the same time.
History : Formerly, there was a difference between a

commercial agency or commission on the one hand, and a
civil agency on the other. A
commercial agency was entered into for commercial purposes; the
civil agency, for other objectives.
Today, however, there is no more commercial agency or
commission in view of the repeal by the new Civil Code
of the Code of Commerce
provisions thereon. (Art. 2270). There- fore, today, whether
the agency be for a civil or a commercial purpose,
it is now called a civil
agency, and is governed by the Civil Code.
Characteristics
- Agency is a principal, nominate, bilateral, preparatory,
commutative, and generally onerous contract.
- Generally, it is also a representative relation, not a
status since agency is not inherent or permanent.
- It is a fiduciary relation since it is based on trust and
confidence.
Essential Elements of Agency:

1. Consent – express or implied, of the parties to
establish the relationship
2. Object – the execution of a juridical act in relation
to third persons
3. Agent acts as representative and NOT for himself
4. Agent acts with the scope of his authority.
Parties to the Contract: The two parties to the contract

are the principal and the agent.
(a) Principal — he whom the agent represents and from whom
he derives authority; he is the one primarily concerned
in the contract.
(b) Agent — he who acts or stands for another. Usually,
he is given full or partial discretion, but sometimes he
acts under a specific
command.
Capacity of the Principal

(a) In general, if he is capacitated to act for himself,
he can act thru an agent. He must, therefore, be
capacitated to give consent. If any
special capacity is needed, it is he who must possess
it and not the agent, for the latter merely acts
in his behalf.
(b) The principal may be natural or a juridical person.
(As a matter of fact, a private corporation and a
partnership can only act thru
agents.)
NOTE: A social club or any other organization cannot act
as a principal if it has no juridical personality.
Individual members thereof
can be bound only if an express or implied agency has
been consented to by each of them.
(c) Generally, an emancipated minor can be a principal. So may
a married woman. As a matter of fact, the
husband may appoint her as
agent or administrator of his capital or of the conjugal
partnership. Similarly, a married woman may appoint her
husband as an agent of
her paraphernal property.
(d) A husband, as administrator of the conjugal partnership
(Art. 165, Civil Code) is in that sense an agent who can bind
conjugal property,
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ATTY. BATUNGBAKAL
subject to legal restrictions, such as those imposed by Art.

166, Civil Code. Thus, a conveyance of conjugal real property
without the needed
consent of the wife is VOIDABLE, and the wife is given ten
years within which to bring an action for annulment.
Capacity of an Agent
His capacity is in general the same as in the law of
contracts, that is, he must be able to bind himself, but
only insofar as his obligations to
his principal are concerned. Insofar as third persons are
concerned, however, it is enough that his principal be
the one capacitated, for
generally an agent assumes no personal liability. Usually,
therefore, the contract with a stranger is valid, even
if the agent be a minor so
long as his principal was capacitated. However, as between
them (principal and agent), the minor-agent can set up his
incapacity, provided
he is not in estoppel.
Distinctions
(a) Agency from Partnership - An agent acts not for himself,
but for his principal; a partner acts for himself, for
his firm, and for his part-
ners. It may even be said that partnership is a branch of
the law on agency.
(b) Agency from Loan - An agent may be given funds by the
principal to advance the latter’s business, while a
borrower is given money for
purposes of his own, and he must generally return it,
whether or not his own business is successful. A lot
however depends on the intent of
the parties.
(c) Agency from Guardianship
AGENCY
GUARDIANSHIP
.
1) The agent represents a capacitated person.
1) A guardian represents an incapacitated person.
2) The agent is appointed by the principal and can be

2) The guardian is appointed by the court, and stands
in loco
removed by the latter.

parentis.
3) The agent is subject to the directions of the

3) The guardian is NOT subject to the directions of
the ward,
principal.
but must of course act for the benefit of the latter.
4) The agent can make the principal personally liable. 4) The

guardian has no power to impose personal liability on
the ward
(d) Agency from Judicial Administration

AGENCY
JUDICIAL ADMINISTRATION
1) Agent is appointed by the principal.
1) Judicial administrator is appointed by the court.
2) He represents the principal.
2) He represents not only the court but also the heir and
creditors of the estate.
3) Agent generally does not file a bond.
4) Agent is controlled by the principal thru their
agreement.
3) The administrator files a bond.

4) His acts are subject to specific orders from the court.
(e) Agency from Lease of Property

AGENCY
LEASE OF PROPERTY
1) The agent is controlled by the principal.
1) The lease is not controlled by the lessor.
2) The agency may involve things other than
2) Obviously, a lease of property involves property only.
property.
3) The agent can bind the principal.
3) The lessee, as such, cannot bind the lessor.
(f) Agency from Lease of Services (or Master-Servant

Relationship)
AGENCY
LEASE OF SERVICES
1) Agent represents the principal.
1) The worker or the lessor of services does not
represent his
employer.
2) Relationship can be terminated at the will of either
2) Generally, the relationship can be terminated only at the
will
principal or agent.
of both.
3) Agent exercises discretionary powers.
3) The employee has ministerial functions.
4) Usually involves 3 persons: the principal, the agent,
4) Usually involves only two persons.
and a stranger.
NOTE: It should be understood however that an agent may

incidentally render acts of service, while a lessor
of services or employee
may incidentally make contracts.
(g) Agency from a Contract with an Independent Contractor

AGENCY
INDEPENDENT CONTRACTOR
1) The agent acts under the control of the principal.
1) The independent contractor is authorized to do the work
according to his own method, without being subject to the
other
party’s control, except insofar as the RESULT of the
work is
concerned
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2) The agent of the agent may be controlled by the

principal.
3) Agent can bind the principal.
4) The negligence of the agent is imputable to the
principal.
(h) Agency from Negotiorum Gestio

AGENCY
1) There is a contract caused by a meeting of the
minds,
expressly or impliedly.
2) Agent is controlled by the principal.
3) The legal relation is created by the parties.
2) The employees of the contractor are not the employees of

the
employer of the contractor.
3) Ordinarily, the independent contractor cannot bind the
employer by tort.
4) The negligence of the independent contractor is generally not
imputable to his employer.
NEGOTIORUM GESTIO
1) This is only a quasi- contract, there having been no
meeting of
the minds. Hence, the representation was not agreed upon.
(NOTE: Once there is an agreement or ratification, there arises
an express agency.)
2) The officious manager follows his judgment and the
presumed will of the owner.
(NOTE: The manager is of course supposed to act with
due
diligence.)
3) The legal relation is created by the law (occasioned of
course
by the acts of the manager).
(i) Agency from Trust

AGENCY
1) Agent usually holds no title at all.
2) Usually, agent acts in the name of the principal.
3) Usually, agent may be terminated or revoked at any
time.
4) Agency may not be connected at all with property.
5) Agent has authority to make contracts which will be
binding on his principal.
6) Agency is really a contractual relation.
(j) “Agency to Sell” from Sale

AGENCY TO SELL
1) Ownership of the goods is not transferred to the
agent.
2) Here, the agent DELIVERS the price.
(k) “Agency to Buy” from Sale

SALE
1) The buyer acquires ownership for himself.
2) The buyer who obtains a discount does not have to
reveal such fact to its own buyer.
3) The buyer pays the price.
TRUST
1) Trustee may hold legal title to the property.
2) The trustee may act in his own name.
3) The trust is usually ended by the accomplishment of the
purposes for which it was formed.
4) Trust involves control over property.
5) Trustee does not necessarily or even possess such authority
to bind the trustor or the cestui que trust.
6) A trust may be the result of the contract or not;
it may be
created also by law.
SALE
1) Ownership is transferred to the buyer (after delivery).
2) The buyer PAYS the price.
AGENCY TO BUY
1) The agent acquires ownership in behalf of the principal.
2) The agent must account for all benefits or discounts
received from the seller.
3) The agent delivers the price.
‘Agent’ and ‘Broker’ Distinguished

- An agent receives a commission upon the successful conclusion
of a sale. Upon the other hand, a broker earns his pay
merely by bringing
the buyer and the seller together, even if no sale is
eventually made.
- A broker is “one who is engaged, for others, on
a commission, negotiating contracts relative to property
with the custody of which he
has no concern; the negotiator between other parties, never acting
in his own name but in the name of those who employed
him. A broker
is one whose occupation is to bring the parties together, in
matters of trade, commerce, or navigation.”
Acts that may be / may not be delegated to agents:

General Rule: What a man may do in person, he may do
through another;
EXCEPT:
1. Personal acts – personal performance is required by law or
public policy or agreement of the parties, the doing
of the act by a
person on behalf of another does not constitute performance
of the latter. [i.e. right to vote, making of a will,
statements required
to be made under oath, agents to sub-agents performance of acts
to be performed in person]
2. Criminal acts or acts not allowed by law – an
attempt to delegate to another authority to do an
act which if done by a principal is
illegal is void.
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Determination of existence of Agency : The question of

whether an agency is has been created is established
by either direct or
substantial evidence, the question is ultimately one of intention.
Knowledge of agent imputed to principal –

1. Agent’s duty of notification – agent is required to notify
the principal of ALL matters that come to his attention
that are MATERIAL
to the subject matter of the agency
2. Relationship of attorney and client – being a relationship
of confidence, there is ever-present need for the latter
being adequately
and fully informed of the mode and manner in which his
interests are defended. He is entitled to full disclosure
of why certain
steps are taken an why certain matters are either included
or excluded
3. Knowledge of the principal – the knowledge of principal
is not imputed to agent
EXCEPTIONS TO RULE:
1. When agent’s interests are adverse to the principal
2. Where agent’s duty is not to disclose the information as
where he is informed b confidential information
3. Where the person claiming the benefit of the rule
colludes with agent to defraud the principal.
Art. 1869. Agency may be express, or implied from the acts

of the principal, from his silence or lack of action,
or his failure to repudiate the
agency, knowing that another person is acting on his
behalf without authority.
Agency may be oral, unless the law requires a specific
form.
Kinds of Agency According to Manner of Constitution

(a) express
(b) implied — from
1) acts of the principal;
2) principal’s silence;
3) principal’s lack of action;
4) principal’s failure to repudiate the agency.
(NOTE: In these cases of implied agency the principal knows
that another person is acting on his behalf
without authority.)
Kinds of Agency According to Character

(a) gratuitous – where agent receives no compensation for his
services
(b) compensated/onerous – where agent receives compensation for
services [Art. 1875]
Kinds of Agency as to Business Covered/ Authority Conferred

(a) General/ Couched in General terms – one which comprises
all businesses of the principal referring to acts of
administration
(b) special / couched in specific terms – one which
comprises specific transactions/ performance of specific acts
Kinds of Agency As to Nature and Effects

(a) ostensible or representative – where agent acts in the name
and representation of the principal [Art. 1868]
(b) simple or commission – where agent acts in his own name
but accounts for the principal
Kinds of Agency According to Form

(a) Oral — (Generally, this is sufficient.)
(b) Written
(NOTE: An example of an instance when the law requires
a specific form for the agency is in Art. 1874 which
states that “when a sale of
land or any interest therein is through an agent, the
authority of the latter shall be in writing; otherwise,
the sale shall be void.”)
Art. 1870. Acceptance by the agent may also be express, or

implied from his acts which carry out the agency, or from
his silence or inaction
according to the circumstances.
Art. 1871. Between persons who are present, the acceptance of

the agency may also be implied if the principal
delivers his power of attorney
to the agent and the latter receives it without any
objection. (n)
Art. 1872. Between persons who are absent, the acceptance of

the agency cannot be implied from the silence of
the agent except:
(1) When the principal transmits his power of attorney to the
agent, who receives it without any objection;
(2) When the principal entrusts to him by letter or
telegram a power of attorney with respect to the
business in which he is habitually engaged
as an agent, and he did not reply to the letter or
telegram.
Rules if the Parties Are “Absent” (Not “Present”)

In No. (1) as distinguished from No. (2), just because the
offeree did not reply does not mean that the agency has
been accepted. For if this
would be equivalent to implied acceptance, there would be no
difference between No. (1) and No. (2).
A good instance of implied acceptance in No. (1) would be
when the offeree writes a letter acknowledging the
receipt of the offer, but
offers no objection to the agency. If he does not write
such a letter, it may be because he simply wants
to ignore the offer, or he may have
forgotten about it, or he is still undecided; hence, in this
latter case, it would be unfair to presume acceptance.
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Another instance of implied acceptance is when the silent

offeree begins to act under the authority conferred upon
him.
Art. 1873. If a person specifically informs another or

states by public advertisement that he has given a
power of attorney to a third person,
the latter thereby becomes a duly authorized agent, in
the former case with respect to the person who
received the special information, and in
the latter case with regard to any person.
The power shall continue to be in full force until the notice
is rescinded in the same manner in which it was given.
(n)
Informing Other People of the Existence of the Agency -

Two ways are given here:
(a) special information;
(b) public advertisement.
Comment of Justice J.B.L. Reyes - To forestall fraud,

the following paragraph must be added to Art. 1873.
“But revocation made in any manner shall be effective against
all persons having actual knowledge thereof.”
Problem: A company wrote a circular letter to its

customers introducing a certain X as its duly authorized
agent. One customer then dealt
with the company thru X. One day, X’s authority was revoked,
but the customer continued to deal thru X since it never
was informed by
circular or otherwise of the revocation. Issue: Is the
Company still liable for X’s acts even after the revocation
of the agency?
ANS.: Yes, for the customer was in good faith, not having
been informed by circular or otherwise, of the revocation.
Agency by Estoppel - If A leads B to believe that

C is his (A’s) agent, when as a matter of fact
such is not true, and B acts on such mis-
representation, A cannot disclaim liability, for he has
created an agency by estoppel.
Agency by Estoppel Distinguished from Implied Agency

(a) As between the principal and the agent:
1) In an implied agency, the agent is a true agent,
with rights and duties of an agent.
2) In an agency by estoppel (caused for instance by
estoppel on the part of the agent), the “agent” is
not a true agent; hence he has
no rights as such.
(b) As to third persons:
1) If the estoppel is caused by the principal, he is
liable, but only if the third person acted on the
misrepresentation; in an implied
agency, the principal is always liable.
2) If the estoppel is caused by the agent, it is
only the agent who is liable, never the alleged principal;
in an implied agency, the agent
is never personally liable.
Art. 1874. When a sale of a piece of land or any inter-

est therein is through an agent, the authority of
the latter shall be in writing; otherwise,
the sale shall be void.
Agency to Sell Land or Any Interest Therein - Note that

this refers to the sale of a “piece of land or
any interest therein.” “Any interest
therein” includes usufruct, easement, etc. Does it also include
“buildings”? Strictly speaking it does not, but if this
would be the
construction, it would follow that in an agency to sell
a building, it does not have to be in writing. Could
this have been the intent of the
Code Commission?
Effect if the Article is Violated - Note also that if

Art. 1874 is violated, the sale is VOID, not merely
unenforceable. Therefore, the principal
cannot technically RATIFY. If he does so, there should be
no retroactive effect.
Art. 1875. Agency is presumed to be for a compensation,

unless there is proof to the contrary.
Agency Is Presumed to Be Onerous - Under the old Civil

Code (Art. 1711), agency was presumed to be gratuitous.
In the present Code,
agency is presumed to be for a compensation.
Form of Compensation - Compensation may be in the form

of gratuitous use by the agent of the principal’s real
estate. In the absence of
stipulation, the agent is entitled to compensation only after
he has completely or substantially completed his obligation
as agent. (Arts.
1233, 1234). The compensation may be contingent or dependent
upon the realization of profit for the principal. This is
so in case there is a
stipulation to this effect.
Brokers: A broker is one who in behalf of others,

and for a commission or fee, negotiates contracts relative
to property (with the custody
of which he has no concern). He is the negotiator between
parties, never acting in his own name, but in the name
of those who employ him;
he is strictly a middleman, and for some purposes, the agent
of both parties. Indeed, he is one whose occupation is
to bring parties together
to bargain, or to bargain for them in matters of trade,
commerce, or navigation.
- Although a broker is an agent, he is
distinguishable from an agent generally by reason of the
fact that his authority is of a special and
limited character in most respects. As to physical activities,
he is an independent contractor.
Compensation of Brokers
(a)Since his only job is to bring together the parties to
a transaction follows that if the broker does not
succeed in bringing the mind of the
purchaser and the vendor to an agreement with reference to
the terms of a sale, he is not entitled to a
commission.
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(b) The doctrine stated above is true even if the sale can
later on be effected between buyer and seller, BUT thru
a DIFFERENT broker. The
first broker can be called UNSUCCESSFUL even if it was
he who first interested the purchaser in the sale, negotiated
with him, and even
indirectly influenced him to come to terms. The fact remains
that he did not succeed in bringing about the sale. It
was the second broker
that accomplished the sale. Even if no subsequent broker had
intervened, still if authority of the first broker had
already been withdrawn
prior to the sale, such broker is not entitled to any fee.
(c) So long as the sale is pushed thru, the broker is
entitled to a commission, even if the sale had been
temporarily delayed due to the
principal’s lack of tact. The important thing is that the sale really
eventually was entered into. Indeed, a broker should
not be made to
suffer for the consequences of the principal’s lack of tact
in handling a delicate situation. (
(d) A broker, however, is not entitled to recover his
expenses during the negotiations for the sale, such
expenses having been incurred at
his own risk, and in consideration of the commission agreed
upon.
Art. 1876. An agency is either general or special.

The former comprises all the business of the principal. The
latter, one or more specific transactions.
General and Special Agencies

(a) The distinction here depends on the EXTENT of the
business covered.
(b) In a sense, the more special the power is, the more
specific it is.
Question: Absent substantial evidence to show a special

agent’s authority from his principal to give consent to
the creation of a tenancy
relationship, can the former’s actions give rise to an
implied tenancy? Answer: No.
Art. 1877. An agency couched in general terms comprises only

acts of administration, even if the principal should state
that he withholds no
power or that the agent may execute such acts as he may
consider appropriate, or even though the agency should
authorize a general and
unlimited management.
Agency Couched in General Terms and in Special Terms
According to the POWER or AUTHORITY conferred, the agency may
be:
(a) couched in general terms (Art. 1877);
(b) or couched in specific terms (special power of attorney).

(Art. 1878). (Here what is important is the nature of
the juridical act.) (
A general agency may be:
(a) couched in general terms;
(b) or couched in specific terms.

A special agency may be:
(a) couched in general terms;
(b) or couched in specific terms.

NOTE: An agency couched in general terms comprises only ACTS
OF ADMINISTRATION (even if the management be apparently
unlimited,
and even if the principal states that he withholds no power
from the agent)
Examples of Acts of Mere Administration

(a) To sue for the collection of debts
(b) To employ workers or servants and employees needed
for the conduct of a business.
(c) To engage counsel to preserve the ownership and pos-
session of the principal’s property.
(d) To lease real property to another person for one year
or less, provided the lease is not registered. (See Art. 1878,
No. 8 by implication).
(e) To make customary gifts for charity or to employees in
the business managed by the agent. (See Art. 1878, No.
6).
(f) To borrow money if it be urgent and indispensable
for the preservation of the things under administration.
(See Art. 1878, No. 7).
NOTE: In order to SELL, an agent must have a special power of
attorney, unless the act of selling itself is part
of ADMINISTRATION, as in
the case of the sale of goods in a retail store.
Art. 1878. Special power of attorney are necessary in the

following cases:
(1) To make such payments as are not usually considered as
acts of administration;
(2) To effect novations which put an end to obligations
already in existence at the time the agency was
constituted;
(3) To compromise, to submit questions to arbitration, to
renounce the right to appeal from a judgment, to waive
objections to the venue of an
action or to abandon a prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the ownership
of an immovable is transmitted or acquired either gratuitously
or for a valuable consideration;
(6) To make gifts, except customary ones for charity or
those made to employees in the business managed by the
agent;
(7) To loan or borrow money, unless the latter act
be urgent and indispensable for the preservation of
the things which are under
administration;
(8) To lease any real property to another person for more
than one year;
(9) To bind the principal to render some service without
compensation;
(10) To bind the principal in a contract of partnership;
(11) To obligate the principal as a guarantor or surety;
(12) To create or convey real rights over immovable
property;
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(13) To accept or repudiate an inheritance;

(14) To ratify or recognize obligations contracted before the
agency;
(15) Any other act of strict dominion.
When Special Powers of Attorney Are Needed

According to Justice J.B.L. Reyes, the acts referred to
in this article can be reduced to three:
(a) acts of strict dominion or ownership (as distinguished
from acts of mere administration)
(b) gratuitous contracts
(c)contracts where personal trust or confidence is of the
essence of the agreement.
Reason for the Rule - In the cases enumerated under this

article, we have in general acts of strict ownership
or dominion, and not mere
acts of administration, hence the necessity of special powers
of attorney except in the cases expressly so mentioned.
Meaning of “Special Powers of Attorney” - this refers

to a clear mandate (express or implied) specifically
authorizing the performance
of the act, and must therefore be distinguished from an agency
couched in general terms. A general power of
attorney may however
include a special power if such special power is mentioned
or referred to in the general power, e.g., “I
authorize you to sell ALL my
properties.” (This does not need a special power to sell for
each property involved, since such special power has already
been given.
NOTE: In general, the execution of a power of attorney does

not need the intervention of any notary public.
Paragraph 1: To make payment - Note that if the

payment is usually considered an act of administration,
no, special power of attorney is
needed. It should be noted, however, that some acts of
administration carry with them the exercise of acts of
dominion, e.g., the sale by an
administrator of fertile land or the products of the land.
Re Paragraph 2:To effect novation - Note here that the

obligations must already be in existence at the time
of the constitution of the
agency.
Re Paragraph 3: To compromise, etc.- Note that there are five (5)

different powers mentioned here. A right given regarding one
is not
enough to grant the others.
Re Paragraph 4: To waive an obligation gratuitously- This is

similar to a condonation or remission. A waiver may
not be inferred when
the terms thereof do not explicitly and clearly prove the intent
to abandon the right.
Re Paragraph 5:To acquire or convey immovable - Note that

this refers only to immovables. (Examples: To sell or to
buy land.) Note the
use of the term “transmitted” or “acquired.”
Under paragraph 15, however, generally the sale or purchase of
personal property should also be covered by a
special power of attorney,
since this is an act of strict dominion.
Re Paragraph 6: To Make gifts- The making of customary

gifts is considered here as an act of administration only.
Re Paragraph 7: To loan or borrow money- Note that the

exception here refers to the latter act, namely,
“borrow,” not “loan.” Agent
however may be empowered to borrow money but the authority
is not to be implied from special power of attorney.
Re Paragraph 8: To lease realty for more than 1 year- Note

here that the lease of real property is referred to, and
not the lease of
personal property. Note also that if the lease of the real
property is for one year or less, the act is one of
mere administration.
Re Paragraph 9: To bind the principal to render service

gratuitously- Reason: Here the contract is gratuitous.
Re Paragraph 10: To bind the principal in a contract of

partnership- Reason: The principal has to personally have
trust and
confidence in the proposed partners.
Re Paragraph 11: To obligate principal as guarantor or surety

- By Contract of Guaranty, the guarantor binds himself
to fulfill the
obligation of the principal debtor in case the latter should
fail to do so, if the person binds himself solidarily,
he is a surety and the contract
is called a suretyship. [Art 2047]
Re Paragraph 12: To create or convey real rights over

immovable property Examples: to mortgage, to create an
easement.
Re Paragraph 13: To accept or repudiate an inheritance –

any person having the free disposal of his property
may accept or repudiate
an inheritance. This is an act of strict dominion hence
the necessity of special authority.
Re Paragraph 14: To ratify obligations contracted before the
agency – an agent cannot effect novation of
obligations existing at the
time of the constitution of the agency unless he be
specially authorized to do so. In the same principle, he
cannot ratify or recognize
obligations contracted before the agency without special power
from the principal
Re Paragraph 15: Any other act of strict dominion-

Generally, a sale or purchase of personal property
is an act of strict dominion,
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ATTY. BATUNGBAKAL
hence a special power is necessary in order to bind the

principal.
Art. 1879. A special power to sell excludes the power to

mortgage, and a special power to mortgage does not
include the power to sell.
Power to SELL- The power to sell carries with it the:

(a) power to find a purchaser or to sell directly;
(b) power to deliver the property;
(c) power to make the usual representation and warranty;
(d) power to execute the necessary transfer documents (like the
execution of the contract itself of sale)
(e) power to fix the terms of the sale, including the time, place,
mode of delivery, price of the goods, and the mode of
payment unless there
be set conditions stipulated by the principal
(f) power to sell only for CASH:
(In the absence of special authority, mere authority to sell
does not give the agent authority to sell on credit. See
Art. 1905 of the Civil Code,
which reads:
“The commission agent cannot without the express or implied
consent of the principal, sell on credit. Should he
do so, the principal
may demand from him payment in cash, but the commission agent
shall be entitled to any interest or benefit which may
result from
such sale.”
(g) power to receive the price, unless he was authorized
only to solicit orders.
NOTE: “Where payments are made over the counter of the
principal’s store to a salesman accustomed to receive money
there for his
employer, authority to receive payment will be implied in
favor of innocent persons, because the principal by his
own act gives the agent
apparent authority to receive payment. But if a salesman
authorized to receive money over the counter only receives
money elsewhere
than in the shop, the payment is not good.”
NOTE: The power to sell DOES NOT carry with it the power:
1) to barter or to exchange
2) to mortgage or to pledge.
Power to MORTGAGE - The power to mortgage does not include

the power:
(a) to sell (Art. 1879);
(b) or to execute a second mortgage (
(c) to mortgage for the agent’s personal benefit or for
the benefit of any third person, unless contrary has
been clearly indicated.
Ordinarily, the mortgage can be made only on the present
property of the principal, and not on hereafter acquired
property
(acquired after the execution of the power of attorney) but the
contrary can be stipulated upon. It is essential, however,
that at the
time of the execution of the mortgage itself, the principal
must already be the owner; otherwise, the mortgage is
VOID.
Art. 1880. A special power to compromise does not authorize

submission to arbitration.
Special Power to Compromise

(a) An agent authorized to compromise can do anything which the
principal himself can do to effect a settlement unless
there is a
contrary legal provision, as in this Article.
(b) A special power to submit to arbitration does not authorize
the power to compromise. This is the logical inference that
can be
made from Art. 1880.
Reason why a special power to compromise does not authorize

submission to arbitration.
A principal may authorize his agent to compromise because of
absolute confidence in the latter’s judgment and discretion
to protect the
former’s rights and obtain for him the best bargain in
the transaction. If the transaction would be left in the
hands of an arbitrator, said
arbitrator may not enjoy the trust of the principal. A fundamental
principle of agency shall have been violated, namely, that
an agent must
possess the trust and confidence of the principal.
Special Power to Submit to Arbitration - When an agent is

specifically empowered to submit a matter to
arbitration, the arbitral award
binds the principal, provided the agent acted within the scope of
his authority. However, when no designation had been made by
the
principal and on the contrary the agent was authorized to submit
the controversy to ANYONE, it was held that the agent could
agree to an
arrangement for the appointment of ADDITIONAL arbitrators; moreover,
it would be permissible for the agent to agree that an award
could be validly made by LESS than the FULL number of the
arbitrators selected.
Art. 1881. The agent must act within the scope of his authority.
He may do such acts as may be conducive to the
accomplishment of the
purpose of the agency.
Fundamental Principles of Agency - There are two very important

principles of a true agency:
(a) The agent must act within the scope of his authority.
(b) The agent must act in behalf of his principal.
NOTE: It is therefore conceivable that an agent may act under the
2 conditions given, or under only one of them, or under
neither.
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Thus, four instances may arise:

1) The agent acts with authority and in behalf of the
principal.
2) The agent acts with authority but in behalf of himself
(not the principal).
3) The “agent” acts without authority but in behalf of
a “principal.”
4) The “agent” acts without authority and in his own behalf
(not a “principal”).]
[NOTE: In (3) and (4), “agent” and “principal” are in
quotation marks because they are NOT really such.]
Effects
(a) WITH AUTHORITY:
1) In PRINCIPAL’S behalf — VALID (principal is bound; agent

not personally liable unless he bound himself). (Art. 1897).
2) In AGENT’S behalf — APPLY Art. 1883
(generally not binding on principal; agent and stranger are the

only parties, except regarding things belonging to the
principal). (
(b) WITHOUT AUTHORITY:
1) In “PRINCIPAL’S” behalf — UNAUTHORIZED AND
UNENFORCEABLE (Art. 1403, No. 1) but may be ATIFIED, in
which case it may
be validated from the very beginning. (Art. 1407).
2) In “AGENT’S” behalf — VALID, whether or not the
subject matter belongs to the principal, provided that
at the time delivery is
to be made, the “agent” can transfer legally the ownership
of the thing. Otherwise, he will be held liable for
breach of warranty
against eviction. Art. 1883 does NOT apply.
Authority Discussed
(a) Authority defined. The right of the agent to effect the
legal relations of his principal by the performance of acts
effectuated in
accordance with the principal’s manifestation of consent.
(b) Kinds of Authority:
1) express (here, the authority is clearly defined)
2) implied (this includes necessary acts to accomplish the

purpose)
3) general (the agent’s discretion is COMPLETE)
4) special (here, particular instructions are given)

5) apparent (here, the “agent” or a third person was
led by the principal’s conduct or words to believe that
the “agent” was really
authorized, when in fact he was not. The effect here is as
if there really was authority).
Examples of Implied Authority:

1) If an agent is authorized to collect a debt, he
usually is also impliedly authorized to employ an
attorney as counsel, and to bring suit for
the enforcement of the payment.
2) If an agent is authorized “to exact the payments of the
debt by legal means,” he has the right to institute a
legal suit for its recovery.
3) An agent or attorney-in-fact who is authorized to pay the
debts of the principal and to employ an attorney to
defend the interests of the
latter is naturally impliedly empowered to pay the fees of
the attorney for services rendered in the interest of
said principal. Moreover, he
is empowered to effect the payment of the fees by
assignment to the attorney of the judgment awarded to
his principal.
NOTE: True, there can be no valid assignment of things in
litigation in favor of the participating lawyers — Art.
1491, No. 5 — but
after the litigation, there can be such an assignment.
4) In the very nature of things an agent cannot sell
hemp in a foreign (or even in our) country without
making some kind of a contract,
and if he has authority to sell, it would carry with it
authority to make and enter into the usual and customary
contract of sale.
No Implied Authority in the Following:

1) An agent authorized to borrow necessary funds has no
authority to pay his own personal debts therewith.
2) An agent authorized to collect a debt has no right to
make a novation of the contract and to release the
sureties of the debtor.
3) An agent authorized to collect money belonging to his
principal does not possess the implied authority to
indorse the checks which had
been received by him in payment.
4) An agent authorized to borrow is not impliedly authorized
to pay the loan at maturity, nor is he allowed to
give the money received to a
third person.
5) Authority to collect does not carry with it authority to
receive partial payment, nor the authority to accept
commercial paper as
payment of the debt. It should be noted, however, that
although receipt of a check is unauthorized still if
the agent is able to collect the
monetary equivalent, the payment should be considered GOOD, and
the debt is therefore extinguished.
[NOTE: If an agent is authorized to conduct a business
involving the acceptance of checks or notes there is
naturally an implied authority to
accept and to indorse such commercial paper as will come to
the agent in the course of the business.
Doctrine of Agency by Necessity - Strictly speaking, an

agency can never be created by necessity. What is meant
by the phrase “agency by
necessity” is, however, this: that by virtue of the existence
of an emergency, the authority of an agent is
correspondingly enlarged in order
to cope with the exigencies or the necessities of the moment.
In the case of Vandalia R. Co. v. Bryan, five
conditions were laid down for
“authority of agency by necessity” (agent ex necessitate):
(a) the real existence of an emergency;
(b) inability of the agent to communicate with the principal;
(c) the exercise of the additional authority for the principal’s
own protection;
(d) the adoption of fairly reasonable means, premises duly
considered;
(e) the ceasing of the authority the moment the emergency
no longer demands the same.
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‘Authority’ Distinguished from ‘Power’ - While “authority” and

“power” may be often used as synonymous terms, still there
is a slight
distinction in that authority may be considered the cause, while
power is the effect. In other words, authority emanates
from a principal,
and is given to the agent, who thus becomes empowered. The
agent who is thus authorized now possesses power.
NOTE: Power may thus be express, implied, or incidental.
NOTE: A power of attorney or letter of attorney is
authority given in writing. The agent given the power of
attorney may be referred to as
an attorney in fact.
‘Authority’ Distinguished from ‘Instruction’

AUTHORITY
INSTRUCTIONS
(a) Principal affects only third persons, because if the act
is
(a) Concern only the principal and the agent.
done outside the scope of the agent’s authority, the principal
is not bound.
(b) Third persons must therefore verify or investigate the
(b) Third persons do not have to investigate or verify
the
authority. (NOTE: If a person makes an inquiry, he is
instructions.
chargeable with knowledge of the agent’s authority, and his
ignorance of the authority will not be any excuse.)
Art. 1882. The limits of the agent’s authority shall not be

considered exceeded should it have been performed in a
manner more advantageous
to the principal than that specified by him.
When Agent’s Performance of Authority is Deemed Still Authorized

- This is justified because of the greater benefit
that would accrue
to the principal. “Advantageous,” however, does not only refer to
a financial gain, which may be offset by a moral or
ethical loss.
Example: If an agent was asked to sell on the installment
plan an object for P100,000, but he is able to get
P100,000 cash for the
object, he is deemed not to have exceeded his authority.
Sale at a Lower or Higher Price- The agent should not

sell things received by him from his principal at a
price less than that fixed by the
latter. But there is NO prohibition against his selling the
goods at a better price, if said price can be
obtained. However, the conditions of
the sale must remain unaltered, hence authorization to sell for
cash does not carry with it authorization to sell on
credit, even if by such
device a higher price can be obtained.
Art. 1883. If an agent acts in his own name, the principal
has no right of action against the persons with whom
the agent has contracted;
neither have such persons against the principal.
In such case the agent is the one directly bound in favor of
the person with whom he has contracted, as if the
transaction were his own, except
when the contract involves things belonging to the principal.
The provisions of this article shall be understood to be
without prejudice to the actions between the principal
and agent.
Agency With an Undisclosed Principal - This Article speaks

of a case where the agent WAS AUTHORIZED, but instead of
acting in behalf
of the principal, he acts in his own behalf. Thus, Art. 1883
does not apply if the agent was unauthorized or he acts
in excess ‘of his
authority.’
Example of the General Rule - Jose asked Pedro to borrow

money from Juan. Pedro did not disclose to Juan that he
(Pedro) was borrowing
in Jose’s behalf; that is, Pedro borrowed in his own name.
Can Juan ask Jose to pay the debt? ANS.: No. Only Pedro has
the duty to pay Juan.
Example of the Exception - A principal told his agent to

sell his (the principal’s) car for him (the principal). The
agent sold it to a third
party. The agent acted in his own name. Can the third party sue
the principal in case the car has hidden defects?
ANS.: Yes. In this case, although the agent acted in his own name,
still the sale involved a car belonging to the principal.
Here we apply the
exception stated in the second paragraph of Art. 1883. As
a matter of fact, the sale is completely valid.
When Agent Transacts Business in His Own Name - If an agent

transacts business in his own name, it is not necessary
for him to state
who is the principal, and he is directly liable as if
the business were for his own account, to the person
with whom he transacts the same.
When Authorized Agent Buys in His Own Name But Really in Behalf
of His Principal - If an authorized agent buys in his
own name
but really in behalf of his principal, the seller has
the option to look to EITHER for payment unless:
(a) he trusted the agent exclusively;
(b) or by the usage and understanding of business, the agent
only is held;
(c) or unless the special circumstances of the case reveal
that only the agent was intended to be bound and the seller
knew it, or was
chargeable with knowledge of it.
When Authority of Agent is Doubtful - If it cannot be

determined whether or not the agent was authorized, or had
disclosed a principal,
the action must be directed against both the “agent” and
the “principal.”
Regarding “Things Belonging to the Principal” - This means that

in the case of this exception, the agent’s apparent
representation yields
to the principal’s true representation; and that, in reality and
in effect, the contract must be considered as entered
into between the
principal and the third person and consequently, if the
obligations belong to the former, to him alone must also
belong the rights arising
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from the contract.
Chapter 2 OBLIGATIONS OF THE AGENT

Art. 1884. The agent is bound by his acceptance to carry out the
agency and is liable for the damages which,
through his nonperformance, the principal may suffer.
He must also finish the business already begun on the death
of the principal, should delay entail any danger.
Duty of Agent to Carry Out the Agency - An agent who does

not carry out the agency is liable for damages. Upon
the other hand, if he
fulfills his duty, he is not personally liable unless he
so binds himself.
Liability of Lawyer Who Fails to Perfect an Appeal -

The mere fact that a lawyer fails to perfect an appeal
of his client does not give rise
to damages in the absence of showing that the decision
which became final was unjust.
Effect of Principal’s Death - Angel was Pedro’s agent. Angel

was performing a business of the agency when suddenly
Pedro died.
Although as a rule, the death of the principal extinguishes
the agency, Angel is obliged to finish the business
already begun if delay should
entail any danger. (Art. 1884, par. 2).
Agent Who Sells to Himself - An agent who has been authorized

to sell some merchandise is not allowed to bind the
principal by selling
to himself (the agent) directly or indirectly. Hence, if
an agent, through his own sub-agent, buys from the
principal, the principal is not
required to fill such orders unless said principal ratifies
the sale after he has had full knowledge of the facts of
the case.
GENERAL OBLIGATIONS of Agent to Principal [de Leon]

1. Good faith and loyalty to his trust, agent’s first duty
[Fiduciary Duty]
- Presumption: agent acted in good faith and principal, until notice
is received of a breach of relational duties, may
rely upon his
agent’s faithfulness
- when not applicable : where NO relation of trust/confidence
exists between the parties
1. where agent is merely an instrument

2. where agent is more properly a servant/ to perform a
service/ or
3. where there is no showing of agency relationship

2. Obedience to principal’s instruction
3. Exercise of reasonable care
Specific Obligations:
I. Act within scope of authority
a. The agent must act within the scope of his authority. He
may do such acts as may be conducive to the
accomplishment of the
purpose of the agency. [1881]
b. In the execution of the agency, the agent shall act in
accordance with the instructions of the principal. In
default thereof, he shall do
all that a good father of a family would do, as
required by the nature of the business. [1887]
c. If a duly authorized agent acts in accordance with the orders
of the principal, the latter cannot set up the
ignorance of the agent as to
circumstances whereof he himself was, or ought to have been,
aware. [1899]
d. So far as third persons are concerned, an act is deemed
to have been performed within the scope of the agents
authority, if such act
is within the terms of the power of attorney, as written,
even if the agent has in fact exceeded the limits of
his authority according to
an understanding between the principal and the agent. [1900]
e. A third person cannot set up the fact that the

agent has exceeded his powers, if the principal has
ratified, or has signified his
willingness to ratify the agents acts. [1901]
f. A third person with whom the agent wishes to
contract on behalf of the principal may require the
presentation of the power of
attorney, or the instructions as regards the agency.
Private or secret orders and instructions of the
principal do not prejudice third
persons who have relied upon the power of attorney or
instructions shown them. [1902]
g. Acts of an agent beyond his limited powers are null;
three qualifications whereby the principal is held bound:
[Strong v Gutierrez-Repide]
1. where his acts have contributed to deceive a person

in good faith
2. where the limitations upon the power created by him could

not have been known by a third person
3. where he has placed in the hands of the agent

instruments signed by him in blank.
h. Where similar acts have been approved by the directors as
a matter of general practice, custom and policy,
the general manager
may bind the company without formal authorization of the
board of directors.
In varying language, existence of such authority is
established by proof of the course of business, the usages
and practices of the
company and by the knowledge which the board of directors has,
or must be presumed to have, of acts and doings of
its
subordinates in and about the affairs of the corporation.
[Board of Liquidators v Kalaw]: Where the practice of
the corporation has
been to allow its general manager to negotiate and execute
contracts in
i. Ratification by a corporation of an unauthorized act or
contract by its its copra trading activities for and in
Nacoco’s officers or
others relates back to the time of the act or contract
ratified behalf without prior board approval, and the board
itself, by its
acts and thru acquiescence, and is equivalent to original
authority. [Board of Liquidators v Kalaw] practically laid
aside the
by-law requirement of prior approval, the contracts of the
general
II. Carry out or not manager, under the given circumstances, are
valid corporate acts.
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ATTY. BATUNGBAKAL
a. The agent is bound by his acceptance to carry out the

agency, and is liable for the damages which,
through his non-performance, the
principal may suffer. He must also finish the business
already begun on the death of the principal, should delay
entail any danger.
[1884]
b. The agent, even if he should withdraw from the
agency for a valid reason, must continue to act until
the principal has had
reasonable opportunity to take the necessary steps to meet the
situation. [1929]
c. An agent shall not carry out an agency if its execution
would manifestly result in loss or damage to the
principal. [1888]
d. When an agent in executing the orders and commissions of
his principal carries out the instructions he has
received from his
principal, and does not appear to have exceeded his authority
or to have acted with negligence, deceit or fraud, he
cannot be held
responsible for the failure of his principal to accomplish the
object of the agency. [Gutierrez Hermanos v Oria
Hermanos & Co]
III. Act with diligence

a. In case a person declines an agency, he is bound
to observe the diligence of a good father of a
family in the custody and preservation
of the goods forwarded to him by the owner until the latter
should appoint an agent or take charge of the goods.
[1885]
b. In the execution of the agency, the agent shall act in
accordance with the instructions of the principal. In
default thereof, he shall do
all that a good father of a family would do, as
required by the nature of the business. [1887]
c. The agent is responsible not only for fraud, but also for
negligence, which shall be judged with more or less rigor by
the courts,
according to whether the agency was or was not for a
compensation. [1909]
IV. Advance funds

a. Should there be a stipulation that the agent shall
advance the necessary funds, he shall be bound to do
so except when the principal
is insolvent. [1886]
b. The principal must advance to the agent, should the
latter so request, the sums necessary for the execution
of the agency. [1912]
- Should the agent have advanced them, the principal
must reimburse him therefor, even if the business or
undertaking was not
successful, provided the agent is free from all fault. The
reimbursement shall include interest on the sums advanced,
from the day
on which the advance was made.
V. Prefer interest of principal over personal interest.

a. The agent shall be liable for damages if, there being a
conflict between his interests and those of the principal,
he should prefer his
own. [1889]
b. When two persons contract with regard to the same thing,
one of them with the agent and the other with the principal,
and the two
contracts are incompatible with each other, that of prior date
shall be preferred, without prejudice to the provisions of
Article 1544.
[1916]
- If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person
who may have first
taken possession thereof if it should be movable property.
Should it be immovable property, the ownership shall belong
to the
person acquiring it who in good faith first recorded it in
the Registry of Property. Should there be no inscription,
the ownership
shall pertain to the person who in good faith was first in
the possession thereof, to the person who presents the
oldest title,
provided there is good faith.
c. In the case referred to in the preceding article, if
the agent has acted in in good faith, the principal shall
be liable in damages to the
third person good faith, whose contract must be rejected. If
the agent acted in bad faith, he alone shall be responsible.
[1917]
d. The following persons cannot acquire by purchase, even
at a public or judicial auction, either in person
or through the mediation of
another: Agents, the property whose administration or sale may
have been; and, in the absence entrusted to them, unless
the
consent of the principal has been given; [1491(2)]
e. A person who acts as a go-between or middleman
between the vendor and the vendee, bringing them
together to make the contract
themselves, without any power or discretion whatsoever which he could
abuse to his advantage and to the owner’s prejudice, is
not
an agent within the meaning of 1491. The ban in 1491
connotes the idea of trust and confidence; and so, where the
relationship
does not involve considerations of good faith and integrity, the
prohibition should not, and does not apply. To come under
the
prohibition, the agent must be in a fiduciary relation with
his agent. [G. Araneta v De Paterno and Vidal]
VI. Render Account/Deliver

a. Every agent is bound to render an account of his
transactions and to deliver to the principal whatever
he may have received by
virtue of the agency, even though it may not be owing
to the principal. Every stipulation exempting the agent from the
obligation to
render an account shall be void [1891]
b. The agent has an absolute obligation to make a full
disclosure or complete account to his principal of all
his transactions and other
material facts relevant to the agency, so much so that the
law as amended does not countenance any stipulation exempting
the
agent from such an obligation and considers such an exemption as
void. [Domingo v Domingo]
c. An agent who takes a secret profit in the nature
of a bonus, gratuity or personal benefit from the
vendee, without revealing the same
to his principal is guilty of breach of his loyalty
to the latter and forfeits his right to collect the
commission that may be due him,
even if the principal does not suffer any injury by reason
of such breach of fidelity, or that he obtained better
results or that the
agency is a gratuitous one, or that usage or custom allows
it; because the rule is to prevent the possibility of
any wrong, not to
remedy or repair an actual damage. [Domingo v
Domingo]
d. The duty embodied in 1891 does not apply if the agent or
broker acted only as a middleman with the task of merely
bringing
together the vendor and vendee, who themselves thereafter will
negotiate on the terms and conditions of the transaction.
[Domingo
v Domingo]
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ATTY. BATUNGBAKAL
VII. Be Solidarily or Personally Liable

a. The responsibility of two or more agents, even though
they have been appointed simultaneously, is not solidary, if
solidarity has not
been expressly stipulated. [1894]
b. If solidarity has been agreed upon, each of the agents
is responsible for the non-fulfillment of agency, and for
the fault or negligence
of his fellows agents, except in the latter case when
the fellow agents acted beyond the scope of their
authority. [1895]
c. The agent who acts as such is not personally liable to
the party with whom he contracts, unless he expressly binds
himself or
exceeds the limits of his authority without giving such
party sufficient notice of his powers. [1897]
d. If the agent contracts in the name of the principal,
exceeding the scope of his authority, and the principal does
not ratify the
contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers
granted by the principal. In
this case, however, Manila the agent is liable if he
undertook to secure the principals ratification.
- Take note of Memorial v Linsangan: Third person
chargeable with knowledge of agent’s authority if he does
[1898] not inquire as
to the limits of the agent’s power.
e .The following contracts are unenforceable, unless they are
ratified: Those entered into in the name of another person
by one who
has been given no authority or legal representation, or who has
acted beyond his powers; [1403(1)]
- The rule in 1403 that a contract entered into by
an agent beyond his authority is unenforceable does not
apply where the
contract is being enforced as to damages against the agent
itself for doing what it did without authority. 1403 refers
to the
unenforceability of the contract against the principal.
It is being enforced against the agent because 1897
implies that the agent who acts in excess of authority
is personally liable to
the party with whom he contracted. And that rule is complemented
by 1898 which provides that “if the agent contracts in the
name of the principal, exceeding the scope of his authority, and
the principal does not ratify the contract, it shall be
void if the
party with whom the agent contracted is aware of the limits of
the powers granted by the principal. [Napocor v Natl
Merchandising Corp]
f. If an agent acts in his own name, the principal has no
right of action against the persons with whom the agent
has contracted;
neither have such persons against the principal.
In such case the agent is the one directly bound in favor
of the person with whom he has contracted, as if the
transaction were his
own except when the contract involves things belonging to
the principal.
The provisions of this article shall be understood to be
without prejudice to the actions between the principal
and agent. [1883]
- the contract does not fall under this exception if the object
of the contract is one of service; even if equipment
owned by the
principal were used. [Go v CA]
- In which case, the contract must be considered as entered into
between the principal and the third person. [Sy-Juco and
Viardo v
Sy-Juco]
g. An agent who obligates his principal to deliver a
specific property to a third party may not thereafter, to
the prejudice of such third
party, appropriate and apply the same property or its proceeds,
to the payment of debts owing by the principal to the
agent; and the
circumstance that the principal assents to such application of
the property does not alter the case. [National Bank v Welch]
h. An agent who [without authority] or without a principal
is himself regarded as the principal, possessed of all
the rights and subject
to all the liabilities of a principal; a person acting
to act on behalf of a corporation which has no valid
existence assumes such
privileges and obligations and becomes personally liable for such
contracts into or for acts performed as such agent. [Vda.
De
Salvatierra v Garlitos]
VIII. Pay Interest— The agent owes interest on the sums he has
applied to his own use from the day on which he did
so, and on those
which he still owes after the extinguishment of the agency. [1898]
IX. Special Obligations of Commission Agents

a. The commission agent shall be responsible for the goods received
by him in the terms and conditions and as described in
the
consignment, unless upon receiving them he should make a
written statement of the damage and deterioration
suffered by the
same. [1903]
b. The commission agent who handles goods of the same kind and
mark, which belong to different owners, shall distinguish them
by
countermarks, and designate the merchandise respectively belonging
to each principal. [1904]
c. The commission agent cannot, without the express or
implied consent of the principal, sell on credit. Should
he do so, the principal
may demand from him payment in cash, but the commission agent
shall be entitled to any interest or benefit, which may
result from
such sale. [1905]
d. Should the commission agent, with authority of the
principal, sell on credit, he shall so inform the
principal, with a statement of the
names of the buyers. Should he fail to do so, the sale
shall be deemed to have been made for cash insofar as
the principal is
concerned. [1906]
e. Should the commission agent receive on a sale, in
addition to the ordinary commission, another called a
guarantee commission, he
shall bear the risk of collection and shall pay the principal the
proceeds of the sale on the same terms agreed upon with
the
purchaser. [1907]
f. The commission agent who does not collect the credits of
his principal at the time when they become due and
demandable shall be
liable for damages, unless he proves that he exercised
due diligence for that purpose. [1908]
Art. 1885. In case a person declines an agency, she is

bound to observe the diligence of a good father of
a family in the custody and
preservation of the goods forwarded to him by the owner until
the latter should appoint an agent. The owner shall
as soon as
practicable either appoint an agent or take charge of the
goods.
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ATTY. BATUNGBAKAL
Rule if a Person Declines the Agency - A person

is of course free to refuse to be an agent;
however, equity demands the rule set forth in
the first sentence of this Article.
Duty of Owner- Upon the other hand, the owner must also act as
soon as possible:
(a) by appointing an agent, or
(b) by taking charge of the goods.
Art. 1886. Should there be a stipulation that the agent shall

advance the necessary funds, he shall be bound to do
so except when the
principal is insolvent.
Stipulation for Agent to Advance Necessary Funds Example:

Angel is Pedro’s agent. Both agreed that Angel would advance
the necessary funds, but later Pedro became insolvent. Is
Angel still bound to
furnish such necessary funds? ANS.: No more, in view of the
principal’s insolvency.
Art. 1887. In the execution of the agency, the agent shall act
in accordance with the instructions of the principal.
In default thereof, he shall do all that a good father
of a family would do, as required by the nature
of the business.
Agent’s Duty to Follow Instruction

(a) Instruction, as we have already seen, differ from
authority.
(b) In commenting upon this article (Art. 1887) Dalloz, after laying
down the admitted proposition that the acts of an agent beyond
his
limited powers are invalid, states three qualifications which
would bind the principal:
1) where the principal’s acts have contributed to deceived a
third person in good faith;
2) where the limitations upon the power created by the principal
could not have been known by a third person; and
3) where the principal has placed in the hands of the agent
instruments signed by him in blank.
Effect if Agent Follows Instruction - If an agent carrying

out the orders of the principal carried out the
instruction he has received from
said principal, he cannot be held responsible for the failure
of his principal to accomplish the object of the agency
unless the said agent
exceeded his authority or has acted with negligence, deceit, or
fraud.
Clarity of Instructions - It is the duty of the
principal, if he desires an authority executed in a
particular manner to make his terms so clear
and unambiguous that they cannot reasonably be misconstrued. If
he does this, it is the agent’s duty to the principal
to execute the
authority strictly and faithfully; and third persons who know of
the limitations, or who from the circumstances of the
case ought to have
known of them can claim no rights against the principal based
upon their violation.
Different Interpretations Re Instructions - If on the other

hand, the authority be couched in such uncertain terms as
to be reasonably
susceptible of two different meanings, and the agent in good faith
and without negligence adopts one of them, the principal
cannot be
heard to assert, either as against the agent or against
third persons who have, in like good faith and without
negligence, relied upon the
same construction, that he intended the authority to be
executed in accordance with the other interpretation. If in
such a case, the agent
exercises his best judgment and an honest discretion, he
fulfills his duty, and though a loss ensues, it cannot
be cast upon the agent.
How Instructions Are to Be Construed - An instrument

conferring authority is generally, it is said, to be
construed by those having
occasion to act in reference to it, as a “plain man
acquainted with the object in view, and attending reasonably,
to the language used, has in
fact, construed it. He is not bound to take the opinion of
an attorney concerning the meaning of a word not
technical and apparently
employed in a popular sense.
How Execution May Fail - The execution of the authority in

a given case may fail, either:
(a) because the agent has negligently failed to fully exercise
his authority;
(b) or because he has exceeded it.
Excessive Execution - If there has been a complete execution

of the power and the excess can be distinguished and
disregarded, the
authorized portion may be given effect.
Art. 1888. An agent shall not carry out an agency if its

execution would manifestly result in loss or damages to
the principal.
When Agency Should Not Be Carried Out

(a) The reason for the Article is because an agent should
exercise due diligence.
(b) Furthermore, the agent must presumably act for the benefit,
and not to the detriment of the principal.
(c) “Manifestly” means that the execution would damage ANY
principal.
Art. 1889. The agent shall be liable for damages if, there being
a conflict between his interests and those of the
principal he should
prefer his own.
Rule if Agent Prefers His Own Interests - The Article

applies whether the agency is onerous or gratuitous
for here the law does not
distinguish.
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ATTY. BATUNGBAKAL
Art. 1890. If the agent has been empowered to borrow money,

he may himself be the lender at the current rate
of interest. If he has
been authorized to lend money at interest, he cannot borrow
it without the consent of the principal.
Authority to Borrow or Lend Money - Examples:

a) Angel was authorized to borrow money. May Angel lend his
own money to the principal?
ANS.: Yes, at the current rate of interest. Reason —
Principal suffers no injury.
- Justice J.B.L. Reyes has questioned the wisdom of Art.
1890. He says: “It is preferable that the agent be not
permitted to occupy
inconsistent positions, and not allow him to be lender and
borrower at the same time. The temptation to insert terms
unfavorable to the
principal is too great, and lending money involves other
considerations besides rate of interest.
b) Angel has been authorized to lend money at interest. May Angel
borrow the money for himself?
ANS.: No, unless the principal consents. Reason for the law:
The agent may not be a good borrower or he may be
insolvent or he may not be
a good risk. There is danger here that the interests of the
principal would be jeopardized.
Benefit of Principal - The borrowing of the money must be

for the benefit of the principal, and not for the
agent’s personal benefit.
Prohibition to Purchase - It should be noted that under Art.

1491, agents cannot acquire by purchase, even at public
or judicial auction,
either in person or thru the mediation of another, the
property whose administration or sale may have been entrusted
to them, unless the
consent of the principal has been given.
Art. 1891. Every agent is bound to render an account of his

transactions and to deliver to the principal whatever
he may have
received by virtue of the agency, even though it may
not be owing to the principal.
Every stipulation exempting the agent from the obligation to render
an account shall be void.
Duty of Agent to account - An overprice received by the

agent for goods he was to sell at a certain price.
(NOTE: The Article does not apply to case, of solutio
indebiti for in such cases, recovery can be had by
the payor against the agent himself.
Therefore, the agent meantime can keep what had been given to him
by error.)
Stipulation Exempting Agent from Duty to Account

Reason for par. 2: - Against public policy because
it would be conducive to fraud.
Duty to Deliver Funds - If nothing in the contract of

agency provides otherwise, this Art. 1891 imposes on the
agent the obligation to
deliver to his principal all funds collected on his (the
principal’s) account. As a matter of fact, lawyers
are required to render a prompt
accounting for money or property received by them on behalf
of their clients. Failure to do this constitutes professional
misconduct. While
it is true that the lawyer may perhaps possess a lien
on the money in his hands — money that had been collected
on behalf of the clients —
still this fact will not excuse him from the duty of accounting
promptly for the funds received.
No Co-Ownership Over Funds Despite Right to Commission -

Although the agent is entitled to receive a commission,
this fact by itself
would not make him a co-owner regarding the money that have been
collected. Co-ownership is not established. The relationship
of
principal and agent subsists. If the agent subtracts from the money
more than what he is entitled to obtain as his
commission, it cannot be
denied that he has committed estafa.
Agent Should Not Profit for His Own Account- Neither an

agent nor a trustee is allowed to make a profit
for his own benefit as long as
the agency exists or the trust relations continue. To hold
otherwise would be to countenance an unlawful inducement.
Thus, if an agent
should conceal certain facts from his own principal, he should
under no condition be permitted to profit thereby. A
principal on the other
hand is entitled to recover from the agent what may be due
him (the principal) as a consequence of the agency.
Doctrines on the Duty to Account

(a) Whoever administers another’s affairs must render an
account because of the representative relation and
because of the fiduciary
position.
(b) If an agent refuses to account when it is his duty
to do so, the principal may at once terminate the agency
and sue for the balance due. If
the principal dies, the agency is extinguished, BUT the duty
to account subsists, and can be demanded by the
principal’s heirs or legal
representatives
(c) The principal, or his legal representative, has the right to
pass upon the correctness of the accounting.
(d) Corollary to his right to demand an accounting, a
principal has the right to make a reasonable inspection
of the books of account and
memoranda, including the original entries.
(e) An agent, as a consequence of his duty to
account, cannot dispute his principal’s title to the
property in his possession.
Art. 1892. The agent may appoint a substitute if the principal

has not prohibited him from doing so; but he shall be
responsible for
the acts of the substitute:
(1) When he was not given the power to appoint one;

(2) When he was given such power, but without designating
the person, and the person appointed was notoriously
incompetent or insolvent.
All acts of the substitute appointed against the prohibition of
the principal shall be void.
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ATTY. BATUNGBAKAL
Appointment of Substitute for the Agent

(a) A is P’s agent. In their contract of agency,
nothing was mentioned as to whether or not A could
appoint a substitute. A appointed S as
his substitute. Is the appointment of the substitute valid?
ANS.: Yes, but A shall be responsible for the acts of the
substitute. (1st par.,
Art. 1892).
(b) In problem (a), suppose the substitute violated the
instructions of P, whom can P hold liable? ANS.:
P can hold A liable (Art.1892) and
P can also hold S liable. (Art. 1893).
(c) A is P’s agent. A asked P for permission to
appoint a substitute, but A did not mention who the
substitute would be. P agreed. Now, the
substitute violated P’s instructions as well as A’s
instructions, causing damage to P. Can P hold A
liable for the substitute’s actuations, in
case for example, the substitute is insolvent?
ANS.: It depends. If the substitute appointed by A
was at the time of appointment notoriously incompetent or
insolvent, then P can hold
A liable, subsidiarily or even primarily. If the substitute
at the time of appointment was neither notoriously incompetent
or insolvent,
then P cannot hold A liable, either primarily or
subsidiarily. (Art. 1892, No. 2).
(d) A is P’s agent. A was prohibited by P to
appoint a substitute. Nevertheless A appointed S
as substitute. S sold goods belonging to P to B,
who was a purchaser in good faith. Is the sale valid?
ANS.: The sale is completely null and void. The law says
that all acts of the substitute appointed against the
prohibition of the principal
shall be void. (Last par., Art. 1892).
Soundness of the article - Is Art. 1892 sound?

ANS.: Yes, for while ordinarily the agent upon whom the principal has
reposed confidence must do the act himself, still the
principal need
not fear prejudice for in some cases, he can still exact
responsibility from his agent.
Art. 1893. In the cases mentioned in Nos. 1 and 2 of the

preceding article, the principal may furthermore bring an action
against the
substitute with respect to the obligations which the latter has
contracted under the substitution.
When the Principal Can Sue the Substitute

(a) Under the premises given in the Article the principal can
sue both the agent and the substitute.
(b) This is one exception to Art. 1311 respecting the privity
of contracts.
Art. 1311 (Who Are Bound By Contracts - Contracts take effect
only between the parties, their assigns and heirs, except
in case where
the rights and obligations arising from the contract are
not transmissible by their nature, or by stipulation or
by provision of law. The heir
is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of
a third person, he may demand its fulfillment provided
he communicated his
acceptance to the obligor before its revocation. A mere
incidental benefit or interest of a person is not
sufficient. The contracting parties
must have clearly and deliberately conferred a favor upon a
third person.
Art. 1894. The responsibility of two or more agents, even though
they have been appointed simultaneously, is not solidary, if
solidarity has not been expressly stipulated.
Joint Not Solidary Liability
(a) The liability referred to here as well as in the
next article is the liability of the agents towards
the principal, and not that towards third
parties.
(b) The liability is indeed joint and personal, but only
if each can act separately. But if it be essential that
all agents act, and one is unable to
do so, then that one is the ONLY agent liable.
Art. 1895. If solidarity has been agreed upon, each of the agents
is responsible for the non-fulfillment of the agency, and
for the fault
or negligence of his fellow agents, except in the latter
case when the fellow agents acted beyond the scope of
their authority.
When Solidarity Has Been Agreed Upon
(a) Example: P appointed A and B as agents.
Solidarity between the agents was agreed upon. Thru B’s
fault, the agency was not fulfilled.
Can P sue A for damages? ANS.: If B acted within
the scope of his authority, A, being solidary agent, can
be made responsible for the entire
damages, without prejudice to his right later on to recover
from the erring agent.
(b) Example where one acts beyond the scope of his
authority: two solidary agents were appointed to sell the
Cadillac car of the principal.
Unfortunately, one of them sold the Mercury automobile. Here, the
innocent agent cannot be liable at all to the
principal, even if solidarity
had been agreed upon.
Art. 1896. The agent owes interest on the sums he has applied
to his own use from the day on which he did so, and
on those which he
still owes after the extinguishment of the agency.
Liability of the Agent for Interest
(a) Under the old Civil Code, after the word “agency,” there was
the clause “from the time he is put in default.” Under
the new Civil Code,
said clause had been eliminated.
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ATTY. BATUNGBAKAL
(b) This Article is without prejudice to a criminal

action that may be brought because of conversion.
(c) On the other hand, there is no liability for interest
on sums which have not been converted for the agent’s own
use (De Borja v. Borja,
58 Phil. 811), unless of course, at the expiration of the
agency, the agent still owes the principal certain sums. (2nd
part, Art. 1896).
Art. 1897. The agent who acts as such is not personally liable
to the party with whom he contracts, unless he ex-
pressly binds
himself or exceeds the limits of his authority without
giving such party sufficient notice of his powers.
No Personal Liability for Agent
(a) Reason for the law: Said agent who acts as agent does not
represent himself but the principal.
(b) In case of acts by the agent in excess of authority,
the principal cannot be bound unless he ratifies the
act.
(c) If an agent obligates himself personally, aside from acting
in behalf of his principal, both are bound. (Tuazon
v. Orozco, 5 Phil. 596).
(d) If an executor or administrator of the estate of
a deceased person, without proper court authority,
makes a contract regarding said
estate, he imposes upon himself a personal obligation. This
is true even though in signing the contract, he has
described himself as
administrator or executor, with the intent to bind the
estate. (Pacific Commercial Co. v. Hernaez, et al., 51
Phil. 494).
(e) Even if an agent has bound himself to pay the debt, this
fact will not relieve from liability a principal for whose
benefit the debt has
been incurred. The further liability of the agent can be
considered as a further security in favor of the
creditor, and will not preclude or
eliminate the liability of the principal. (Tuazon v. Orozco,
supra).
(f) It is manifest upon the simplest principles of
jurisprudence that one who has intervened in the making
of a contract as an agent cannot
be permitted to intercept and appropriate the thing which the
principal is bound to deliver. If he does this, this would
make performance
by the principal impossible. In any event, the agent must be
prohibited to perform any positive act that could prevent
fulfillment on the
part of his principal. Good faith towards the other contracting party
requires this much. (National Bank v. Welch, Fairchild and
Co., 44 Phil.
780).
Proper Parties to the Suit - An action against a

person who merely acted in behalf of another should
be dismissed. The suit should be
against the principal, not against the agent, except where
the agent acts in his own name or exceeds the limit of
his agency.
Authority to Sell All of the Principal’s Property - A power

of attorney allowing the agent to sell all the property
of the principal is
sufficient to validate the sale of any single parcel of
land which may be included in said properties.
Authority to Agree on Certain Stipulations - If an agent

is authorized generally to sell merchandise, he is also
allowed to include in the
contract of sale, the stipulation which are customary in the trade
in such goods.
Art. 1898. If the agent contracts in the name of the principal,

exceeding the scope of his authority, and the principal does
not ratify
the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers
granted by the
principal. In this case, however, the agent is liable if he
undertook to secure the principal’s ratification.
Contracts Entered Into in Excess of Authority
(a) This Article refers only to the liability of the agent
towards the third person. It is clear that under the
premises given, the principal is
not at all bound, except of course if there is
subsequent ratification by him.
(b) Therefore “it shall be void” refers to the tie between
the agent and the third party. Regarding the principal, other
articles are applicable.
(See Arts. 1403, No. 1 and 1910, par. 2).
Art. 1899. If a duly authorized agent acts in accordance with the

orders of the principal, the latter cannot set up
the ignorance of the
agent as to circumstances whereof he himself was, or ought
to have been, aware.
Effect of Agent’s Ignorance
(a) This article is based on equity, for after all the agent
had complied with his duty.
(b) It is the principal’s fault should he have appointed an
ignorant agent. Equity demands that the principal should
be made responsible.
Compliance With Authority and Instruction - Notice that under this

Article, it is not enough for the agent to act within
the scope of his
authority. It is also imperative for such agent to have complied
with the orders and instruction of the principal.
Art. 1900. So far as third persons are concerned, an act is
deemed to have been performed within the scope of the
agent’s authority,
if such act is within the terms of the power of attorney,
as written, even if the agent has in fact exceeded the
limits of his authority
according to an understanding between the principal and the
agent.
Act Performed Within Terms of Written Authority

(a) This is designed to protect the interest of third
persons.
(b) Notice that for this article to apply, the authority
must be in writing.
Problem: Question: The scope of the agent’s authority is what

appears in the written terms of the power of attorney.
While third persons
are bound to inquire into the extent or scope of the
agent’s authority, are they required to go beyond the
terms of the written power of
attorney?
Answer: No. Third persons cannot be adversely affected by
an understanding between the principal and his agent as
to the limits of the
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ATTY. BATUNGBAKAL
latter’s authority. In the same way, third persons need not

concern themselves with instructions given by the principal
to his agent outside
of the written power of attorney. (Siredy Enterprises, Inc.
v. CA & Conrado de Guz- man, GR 129039, Sept. 17,
2002).
Example: P gave his agent A a power of attorney, wherein

was written A’s right to sell 2 parcels of land
belonging to P. P and A however
had an understanding to the effect that A should only
sell one parcel of land. A sold both. P did not ratify
the contract. Is P bound by the sale
of both parcels?
ANS.: Yes. While it is true that a third party deals with an agent
at his (the third party’s) own risk, and while it is the
duty of the third party
to investigate the extent of an agent’s authority,
nevertheless, in this case the power of attorney as
written showed complete authorization.
It is unfair to demand that the third person inquire
further than the terms of said power of attorney as
written. To hold otherwise would
be to open the door to countless frauds and machinations.
Art. 1901. A third person cannot set up the fact that the
agent has exceeded his powers, if the principal has
ratified, or has signified
his willingness to ratify the agent’s acts.
Effect of Ratification
(a) Ratification in effect grants authority to the agent.
(b) Note that the ratification may be in the future.
Art. 1902. A third person with whom the agent wishes to

contract on behalf of the principal may require the
presentation of the
power of attorney, or the instructions as regards the
agency. Private or secret orders and instructions
of the principal do not
prejudice third persons who have relied upon the power of
attorney or instructions shown them.
Private or Secret Orders - Note that innocent third

persons are not to be prejudiced.
Art. 1903. The commission agent shall be responsible for the goods
received by him in the terms and conditions and as
described in
the consignment, unless upon receiving them he should make
a written statement of the damage and deterioration
suffered by the
same.
‘Commission Agent’ Defined - One in which the commission agent

must be a merchant or broker, the agent having the
option of acting in
his own name or in that of the principal.
Distinction Between a Commission Agent and a Broker

- A commission agent is one engaged in the purchase and
sale for a principal of personal property, which for this
purpose, has to be placed
in his possession and at his disposal. He has a relation
not only with his principal, and the buyers or sellers,
but also with the property
which constitutes the object of the transaction.
- A broker, upon the other hand, maintains no relation with
the thing which he purchases or sells. He is supposed
to be merely a gobetween, an intermediary between
the seller and the buyer. As such, he does not have
either the custody or the possession of the thing that
he disposes of. His only function is, therefore, to bring the
parties to the transaction.
Established Place of Business - It may be said that a

commission agent is an agent, with an established place of
business, allowed to have
in his possession the goods of the principal.
Presumption as to When the Damage to the Goods Occurred -

This Article gives a presumption to the effect that the
damage to the
merchandise were suffered while in the possession and custody of
the agent; such a presumption is only a disputable one
however.
Art. 1904. The commission agent who handles goods of the same kind
and mark, which belong to different owners, shall distinguish
them by countermarks, and designate the merchandise respectively
belonging to each principal.
Art. 1905. The commission agent cannot, without the express or

implied consent of the principal, sell on credit. Should
he do so, the
principal may demand from him payment in cash, but the
commission agent shall be entitled to any interest or
benefit, which may
result from such sale.
Sale by the Commission Agent on Credit (Not Cash)

Example: A was P’s commission agent who was asked to sell P’s
car on cash. A sold it on credit. What are P’s
rights?
ANS.: P may demand from A payment in cash. On the other
hand, A shall be entitled to any interest or benefit
which may result from such a
sale on credit.
Untenable Defense of Agent - The commission agent is not
allowed to escape the effects of this article by
proving that the profits would
have been less had the sale been made on a cash basis. This
defense on the part of the agent is not tenable
because if this were to be
allowed, the way will be open for delay, fraud and bad faith.
Choices Given to the Principal - Two choices are given to

the principal:
(a) Require cash payment — If this is done, the
principal should not be allowed to enrich himself
at the agent’s expense.
(b) Ratify the sale on credit — here the principal
will have both the risks and the advantages.
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Art. 1906. Should the commission agent, with authority of the

principal, sell on credit, he shall so inform the prin-
cipal, with a
statement of the names of the buyers. Should he fail to
do so, the sale shall be deemed to have been made for
cash insofar as the
principal is concerned.
Duty of Agent to Inform the Principal

(a) In this Article, an authorized sale on credit may
be treated of as one on a cash basis.
(b) This Article only talks of the relations between the
commission agent and the principal; third parties should
not be prejudiced.
Reason for the Law - To prevent the commission agent from

stating that a sale which was “in cash” in reality, was
made on the credit
basis.
Art. 1907. Should the commission agent receive on a sale, in

addition to the ordinary commission, another called a
guarantee
commission, he shall bear the risk of collection and shall pay the
principal the proceeds the sale on the same terms agreed
upon
with the purchaser.
Guarantee Commission
(a) The guarantee commission, also called a del credere
commission is different from the ordinary commission.
NOTE: An agent who receives a guarantee commission is called
a del credere agent.
(b) The guarantee commission is given in return for the risks
the agent will have to bear in the collection of credits.
Example of the Purpose If an agent receives a

guarantee commission, and the third party does not pay, the agent
will have to pay the
principal just the same. Thus, an agent was authorized to sell on
credit an Ibañez electric guitar for P40,000 with
a 10% ordinary
commission (P4,000). He was also paid a guar- anteed commission
of 5% (P2,000). His total profit would be, therefore,
P6,000. However’
every time the customer fails to pay an installment that is due,
the agent himself pay said amount to the principal. Thus,
the agent bears the
risk. This is the reason for the “guarantee commission.”
Applicability to Both Cash and Credit Sales Does Art. 1907
include both cash and credit sales? ANS.: Yes, since
the law makes no
distinction. Moreover, there are cash sales which may give a short
term or period.
When Insolvency of Debtor Is Not a Defense If the

agent receives a guarantee commission, he cannot put up
the defense that the
debtor-third person possesses property. This is precisely the
risk the commission agent assumed. This bother need not worry
the
principal.
Art. 1908. The commission agent who does not collect the
credits of his principal at the time when they become
due and demandable
shall be liable for damages, unless he proves that he
exercised due diligence for that purpose.
Failure of Agent to Collect Credits

(a) This Article particularly applies to a case where there
is no guarantee commission. But even if there be one, should
the agent not apply
the proceeds of the sale on the same terms agreed upon by
the purchaser, said agent is liable for interest in lieu
of damages. This, it must
be noted, can be monetary obligation.
(b) Even if a commission agent can prove that he exercised due
diligence on collecting the credits, he would still be
responsible for nonpayment on time in case he assumed the
risks of collection by receiving a guarantee commission.
When Agent is Not Liable in Case of Failure to Collect

- If a commission agent without a guarantee commission
should prove he
exercised due diligence in the collection of the credit, and
the credit is not collected for example, because of
the fault of the third party, the
agent is freed from responsibility. In such an eventuality, the
debtor can be directly proceeded against by the
principal. The principal need
not fear in this case that the debtor can put up defenses
which he (the debtor) could have set up against the agent.
Due Diligence of Agent - One way of showing due diligence

is by making use at the proper time of the legal
means to obtain payment.
Art. 1909. The agent is responsible not only for fraud, but also
for negligence, which shall be judged with more or less rigor
by the
courts, according to whether the agency was or was not
for a compensation.
Responsibility Not Only for Fraud But Also for Negligence

(a) Whether the agency is gratuitous or not is
important in considering the liability of the agent for
negligence.
(b) For fraud, the agent is of course always
liable.
Duty of Agent to Insure - If an agent is instructed to

insure the goods under his custody, and he does not do
so, he is responsible, but if no
such obligation has been imposed by the principal, the agent cannot
be held liable because the obligation to insure is
not one of the duties
required by the law to be performed by the agent.
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Chapter 3 OBLIGATIONS OF THE PRINCIPAL
Art. 1910. The principal must comply with all the obligations which
the agent may have contracted within the scope of his
authority.
As for any obligation wherein the agent has exceeded his power,
the principal is not bound except when he ratifies it
expressly or
tacitly.
Principal’s Duty to Comply With Agent’s Commitments - Under Par.

1 — aside from acting within the scope of his
authority, the agent
must also act in the name of the principal, and not in his
own name; otherwise, the principal is not bound except when
the transaction
concerns things belonging to the principal. (See Art. 1883).
Ratification by Principal - If an agent misrepresents to

a purchaser, and the principal accepts the benefits of
such misrepresentation, he
cannot at the same time deny responsibility for such
misrepresentation.
Art. 1911. Even when the agent has exceeded his authority, the
principal is solidarily liable with the agent if the former
allowed the
latter to act as though he had full powers.
Liability of Principal Because of Estoppel

Reason for the law: The principal may be said to be in
estoppel and therefore innocent third persons should not
be prejudiced. It cannot be
denied that here the principal failed to adopt the needed
measures to prevent misrepresentation.
Solidary Liability
This is an instance when solidarity is imposed by law. It
would seem, however, that this Article is unjust for if
the agent is considered
innocent and acting within the scope of his authority, he
should be exempted from liability. (See Art. 1897).
Art. 1912. The principal must advance to the agent, should

the latter so request, the sums necessary for the
execution of the agency.
Should the agent have advanced them, the principal must reimburse
him therefor, even if the business or undertaking was not
successful, provided the agent is free from all fault.
The reimbursement shall include interest on the sums advanced,
from the day on which the advance was made.
Advancing of Necessary Funds
(a) Failure of the agency through no fault of the
agent must be borne solely by the principal. It is unfair
to hold this failure against an
innocent agent.
(b) Even if the agency be gratuitous, this Article will
also apply; hence, the agent will still be entitled to
reimbursement and interest. This is
so because the reimbursement and interest spoken of in
this Article do not refer to compensation or commission.
Broker’s Fee - A broker is entitled to a commission

if the sale is effected, but not if there is no
perfected transaction.
Art. 1913. The principal must also indemnify the agent for all the
damages which the execution of the agency may have caused
the
latter, without fault or negligence on his part.
Principal to Compensate Agent for Damages

(a) This Article is based on equity, and applies even
if the agency be gratuitous, as a matter of fact,
even more so.
(b) Naturally, this Article can be made use of only if
the agency exists, otherwise the Article cannot apply.
In such a case, the supposed
agent is not acting in behalf of a true principal, and
the reason for the law would cease.
Art. 1914. The agent may retain in pledge the things which
are the object of the agency until the principal
effects the reimbursement
and pays the indemnity set forth in the two preceding articles.
Right of Agent to Retain by Way of Pledge - The

Article speaks of one kind of pledge by operation
of law.
Art. 1915. If two or more persons have appointed an agent for

a common transaction or undertaking, they shall be
solidarily liable
to the agent for all the consequences of the agency.
Solidary Liability of Principals - Solidarity is the rule under

this Article because of the common transaction. Thus,
even if the agent have
been appointed separately, the rule should apply in the interest
of justice.
Examples
(a) W, X and Y employ agent A to sell land owned in
common by the three, with A receiving a commission
of P1,500,000. If A is successful, A
can collect from any of the three the amount of P1,500,000
because of their solidary liability. Of course, if X
pays the P1,500,000, he can
recover reimbursement of P500,000 each from Y and W.
(b) C, D and E appoint F as their agent to sell their
separate houses. The liability of C, D and E are
merely joint and not solidary even if the
appointment is made in one instrument. This is because this is
NOT a common transaction or undertaking.
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Art. 1916. When two persons contract with regard to the same
thing, one of them with the agent and the other with the
principal,
and the two contracts are incompatible with each other, that
of prior date shall be preferred, without prejudice to the
provisions of
Article 1544.
QUESTION — (When Both Principal and Agent Contract with Respect

to the Same Thing) - On Jan. 31, 2000, A who owns
a piece of
agricultural land, gave a general power of attorney to B.
On Feb. 20, 2005, A, without the knowledge of B,
executed in favor of C a special
power of attorney to sell said piece of land. On Feb. 25, 2005,
B as attorney-in-fact of A, executed a deed of sale
in favor of D. On the same
date, Feb. 25, 2005, C, under the special power given by A, sold
the same piece of land to E.
Assuming that the vendees have not yet registered their respective
documents or have taken possession of the land, which of the
two sales
is valid and enforceable and who is responsible for damages, if
any? Reasons.
ANS.: The sale by C in favor of E is valid and enforce-
able because C was specifically granted authority to
sell. B, who only had a general
power of attorney had NO right to sell, since selling ordinarily
is not a mere act of administration. Moreover, under Art.
1878, a special
power of attorney is needed to effectuate a sale. If anyone
is liable for damages, it is certainly B who
performed an unauthorized thing.
Art. 1917. In the case referred to in the preceding article,

if the agent has acted in good faith, the principal shall
be liable in
damages to the third person whose contract must be rejected.
If the agent acted in bad faith, he alone shall be
responsible.
Liability of Principal if Agent Acted in Good Faith or in Bad

Faith - Note the liability of the principal for damages.
Art. 1918. The principal is not liable for the expenses

incurred by the agent in the following cases:
(1) If the agent acted in contravention of the principal’s
instructions, unless the latter should wish to avail
himself of the benefits
derived from the contract;
(2) When the expenses were due to the fault of the agent;
(3) When the agent incurred them with knowledge that an unfavorable
result would ensue, if the principal was not aware
thereof;
(4) When it was stipulated that the expenses would be borne by
the agent, or that the latter would be allowed only
a certain sum.
When Principal Is Not Liable for Agent’s Expenses

(a) Reason for Par. 1 –– to punish the agent.
Reason for the exception — this is implied
ratification.
(b) Reason for Par. 2 — this is self-evident.
(c) Reason for Par. 3 — this is tantamount to bad
faith and lack of due diligence.
(d) Reason for Par. 4 — this stipulation would not
contravene good morals or public policy, etc.
Chapter 4 MODES OF EXTINGUISHMENT OF AGENCY

Art. 1919. Agency is extinguished:
(1) By its revocation;
(2) By the withdrawal of the agent;
(3) By the death, civil interdiction, insanity or
insolvency of the principal or of the agent;
(4) By the dissolution of the firm or corporation which entrusted
or accepted the agency;
(5) By the accomplishment of the object or purpose of
the agency;
(6) By the expiration of the period for which the agency
was constituted.
Keyword for Extinguishment of the agency — ED- WARD

E — Expiration D — Death, etc. W — Withdrawal A
— Accomplishment R — Revocation D — Dissolution
[OTHER CAUSES: Termination by mutual consent, novation, loss
of subject matter of the agency, outbreak of war
if inconsistent with the
agency
Death - Ordinarily, the death of the principal terminates the

agency, even if a period had been stipulated and such
period has not yet
ended. However, under Art. 1931, “anything done by the agent,
without knowledge of the death of the principal or of
any other cause which
extinguishes the agency, is VALID and shall be fully effective
with respect to third persons who may have contracted with
him in good
faith.”
Dissolution - Note that the dissolution of the firm or corporation

(whether it be the principal or the agent) ends the
agency.
Art. 1920. The principal may revoke the agency at will, and
compel the agent to return the document evidencing the
agency. Such
revocation may be express or implied.
Revocation by Principal or Agency

(a) Reason — Agency is generally revocable at the
will of the principal because the trust and confidence may
have been lost.
(b) Revocation at will is proper: 1) even if the
agency is onerous; 2) even if the period
fixed has not yet expired.
When Agency Cannot Be Revoked at the Principal’s Will -The

agency cannot be revoked at will in the following
instances:
(a) When it is “coupled with an interest” (interest
possessed by the agent not in the proceeds arising from
the exercise of the power, but
interest in the subject matter of the power).
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(b) In the cases mentioned under Art. 1927 ––

1) when a bilateral contract depends on the agency;
2) when the agency is the means of fulfilling an
obligation already contracted;
3) in the case of a partner appointed manager in
the contract of partnership and his removal from the
management is
unjustifiable.
(c) When there has been a WAIVER by the principal (however,
the irrevocability of a power of attorney cannot affect
one who is not a party
thereto, it being obligatory only on the principal who created
the agency.)
(d) When the principal is obliged not to revoke. (Here,
the principal can still revoke, but he can be held liable
for damages, for breach of
contract.)
(e) When the revocation is done in bad faith. [Here,
the principal can still revoke, but innocent third parties
should not be prejudiced;
moreover, the innocent agent can be entitled to damages from
him.
Agent Cannot Generally Recover Damages - Under the general

rule, when revocation is proper, the agent cannot get
damages because
the principal is merely exercising a right.
Kinds of Revocation
(a) Express
(b) Implied — as in the following:
1) appointment of a new agent for the same business or
transaction (Art. 1923) provided there is INCOMPATIBILITY.
2) If the principal directly manages the business en-
trusted to the agent, dealing directly with third
persons, in a way
INCOMPATIBLE with the agency.
Art. 1921. If the agency has been entrusted for the purpose
of contracting with specified persons, its revocation shall
not prejudice
the latter if they were not given notice thereof.
Agency for Contracting With Specified Persons

(a) So that innocent third parties may not be prejudiced,
the principal who fails to give the notification can be
held liable for damages.
(b) No notice is required for persons who already
know of the revocation for then the purpose of the
notification shall have already been
served.
Art. 1922. If the agent had general powers, revocation of the
agency does not prejudice third person who acted in good
faith and
without knowledge of the revocation. Notice of the revocation
in a newspaper of general circulation is a sufficient
warning to third
persons.
Agency When Third Parties Are Not Specified

(a) In this Article, as distinguished from the preceding
one, the third persons have not been SPECIFIED.
(b) Note the effect of a revocation in a newspaper
of general circulation.
Art. 1923. The appointment of a new agent for the same business
or transaction revokes the previous agency from the day
on
which notice thereof was given to the former agent,
without prejudice to the provisions of the two preceding
articles.
Effect of Appointment of a New Agent

(a) Appointment of a new agent revokes the first agency only
in case of incompatibility.
(b) A special power revokes a general one. (Art. 1926).
(c) If the first agent is not notified of the appointment

of the second agent, it is understood that the first
agency still exists
Art. 1924. The agency is revoked if the principal directly

manages the business entrusted to the agent, dealing
directly with third
persons.
Effect if the Principal Directly Manages the Business

The rule applies only in case of incompatibility, because it
may be that the only desire of the principal is for
him and the agent to manage
the business together. In case of true inconsistency, the agency
is revoked, for there would no longer be any basis
therefor.
Art. 1925. When two or more principals have granted a power of

attorney for a common transaction, any one of them
may revoke
the same without the consent of the others.
Revocation by One of Two or More Principals

The power to revoke here is a consequence of the solidary
liability of co-principals.
Art. 1926. A general power of attorney is revoked by a

special one granted to another agent, as regards
the special matter involved
in the latter.
Rule When Special Power Is Granted to Another Agent

(a) In this Article, two agents are involved.
(b) A specific right naturally prevails over a general one.
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Art. 1927. An agency cannot be revoked if a bilateral

contract depends upon it, or if it is the means of
fulfilling an obligation already
contracted, or if a partner is appointed manager of a
partnership in the contract of partnership and his removal
from the
management is unjustifiable.
When an Agency Cannot Be Revoked

This enumerates three instances of irrevocability:
(a) If a bilateral contract depends upon the agency.
Example 1: P wanted to make A his surety so P
made A his agent as a sort of inducement to safeguard
him from eventual loss.
Under American Law, this is referred to as an agency or
authority necessary to effectuate a security; it is also
an agency or
authority coupled with an interest.
Example 2: A power to sell, where the property is
delivered to the agent to dispose of it for the
protection of himself and other
creditors is an authority coupled with an interest, and
therefore irrevocable, provided the interest is indicated
in the power of
attorney. (Del Rosario v. Abad, 104 Phil. 648). Example 3:
If the agency is only a clause or a part of
a reciprocal contract. Reasons:
The contract itself and, therefore, also the clause on the
agency, cannot generally be revoked except thru mutual
consent.
(b) If the agency is the means of fulfilling an obligation
already contracted.
Example: Sonia is indebted to Concepcion for the purchase of
a diamond headband. But Sonia in the meantime has no
money. So
she appoints Concepcion as her agent to collect from Maria some
money which Maria owes her (Sonia), which money in turn will
be applied to the purchase price of the headband. It is
clear that Sonia cannot revoke the agency here, unless
she first pays
Concepcion.
Effect When “Interest” Terminates - An agency coupled with

an interest cannot be terminated unilaterally by the
principal, but
revocation can be made AF- TER the interest terminates. So if
the Government allows the De la Rama Steamship Co. to
manage the former’s
vessel for 2 years in order to pay the company for its
help in acquiring the vessels, at the end of said two
years, the Government may end
the agency.
Art. 1928. The agent may withdraw from the agency by giving
due notice to the principal. If the latter should
suffer any damage by
reason of the withdrawal, the agent must indemnify him therefor,
unless the agent should base his withdrawal upon the
impossibility of continuing the performance of the agency
without grave detriment to himself.
Withdrawal by Agent
(a) Just as a principal may revoke generally under Art.
1920, so also may an agent withdraw under Art. 1928.
(b) Reasons of health can justify withdrawal by the
agent.
Effect When Agent Sues Principal - When an agent files a

complaint against the principal for a monetary claim in
the former’s favor,
dignity and decorum will not ordinarily permit the continuation
of the agency. Such a complaint is therefore equivalent
to withdrawal of
the agent from the agency.
Art. 1929. The agent, even if he should withdraw from the

agency for a valid reason, must continue to act until
the principal has had
reasonable opportunity to take the necessary steps to meet the
situation.
When a Withdrawn Agent Must Still Act - Reason for the

Article — to prevent damage to the principal.
Art. 1930. The agency shall remain in full force and effect
even after the death of the principal, if it has been
constituted in the
common interest of the latter and of the agent, or
in the interest of a third person who has accepted
the stipulation in his favor.
When Agency Continues Even After Death of Principal - This

Article speaks of an agency:
(a) coupled with a common interest;
Example of COMMON interest: Zenaida borrows from Jose, and
as security entrusts to Jose a ring, which Jose can sell
in case
Zenaida fails to pay the debt at the time of maturity. Even
if Zenaida dies, the agency of Jose would still remain.
(b) coupled with the interest of a third person who
has accepted the stipulation in his favor.
Example of Interest of a THIRD PERSON: Melady sells his
land to Bravo and appoints Bravo his agent in paying with
the purchase
price what Melady owes Arellano, a third person. Here even when
Melady dies, the agency of Bravo continues to exist.
Agency Coupled With an Interest - It is a well-settled

general rule that if the authority of an agent is
coupled with an interest, it is not
revocable by the death, act, or condition of the principal,
unless there is some agreement to the contrary between
the parties. This is a
well-recognized exception to the rule that the death of the
principal revokes the authority of an agent appointed by
him. However, it must
be noted that an agent whose agency is coupled with an
interest cannot stand on a better ground than a
partner appointed as manager in
the articles of partnership insofar as revocability of
authority or power is concerned. Inasmuch as a partner
appointed as manager in the
articles of partnership can be divested of his power if there
is a just or lawful cause, it follows that an
agent whose agency is coupled with
an interest can also be stripped of his power of attorney,
if there is a JUST CAUSE.
Nature of the Agent’s Interest - In order that a power

may be irrevocable because it is coupled with an
interest, it is necessary that the
interest shall be in the subject matter of the power and
not in the proceeds which will arise from the exercise of
the power. The person
clothed with the power must derive under the instrument creating
it, or from the nature of the relation, a present
or future interest in the
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ATTY. BATUNGBAKAL
thing or subject itself on which the power is to be

exercised, and not merely that which is produced by the
exercise of the power.
Interest is Not the Share in the Profits or the Commission

(a) A power has been held NOT to be coupled with an
interest where the interest arises out of commission or
out of the proceeds of a trans
action as where the agent’s interest is merely his right
to receive, by way of compensation, a certain
percentage of the proceeds.
(b) But a power to make a collection or sale out of the
proceeds to pay an existing debt due to the agent from
the principal is a power
coupled with an interest, as is also an interest, as is
also an authority to the agent to reimburse himself from
such proceeds for advances
made to the principal. It has also been held that authority to
loan money and to collect the same and account for all
over a given percent,
which the agent is to retain as his compensation is
authority coupled with an interest.
The Entire Agreement to Be Construed - Whether an

interest which will make the agency or power irrevocable exists
in a particular case
is to be determined from the entire agreement between the
parties, and from the facts and circumstances attending the
relation existing
between the parties. The terminology used by the parties is
not controlling; even though an agency or power is
made in terms irrevocable,
that fact will not prevent its revocation by the principal where
the agency or power is not in fact, coupled with an
interest. Nor will the fact
of a stipulation in the instrument that the intention of the
grantor of the power is that it shall be construed as
a power of attorney coupled
with an interest in the subject matter thereof prevent
its revocation.
Art. 1931. Anything done by the agent, without knowledge of

the death of the principal or of any other cause which
extinguishes
the agency, is valid and shall be fully effective with respect
to third persons who may have contracted with him in good
faith.
Effect of Agent’s Act Without Knowledge of the Termination

of the Agency - Note that the law here requires the
third persons to be in
good faith. If in bad faith, they cannot be protected.
Rule in Case Business Was Already Begun - Under the second

paragraph of Art. 1884, the agent “must also finish the
business already
begun on the death of the principal should delay entail any
danger.”
Art. 1932. If the agent dies, his heirs must notify the principal
thereof, and in the meantime adopt such measures as the
circumstances may demand in the interest of the latter.
Death of the Agent - If the heirs of the dead agent are unable
to give notice, one good measure for them to do is
to consign the object or
property of the agency in court. In this way, they can
still protect the interests of the principal, who trusted
their predecessor in interest.
The heir’s duty arises from what may be termed as a
presumed agency or tacit agency or an agency by
operation of law.
Effect of Agent’s Death in Case of Agency Coupled with

an Interest - In an agency coupled with an
interest, does the death of the agent
terminate the agency?
ANS.: Generally, the agent’s death ends the agency for it should
not be continued by one upon whom the principal has
reposed no
confidence, but under American Law, when the agency is coupled
with an interest, it has been held that the agent’s death
does not
terminate the agency; such a power may be subsequently
exercised by his personal representative, at least insofar
as may be essential to
protect the interests of the estate of the agent.
TITLE V. — TRUSTS | Chapter 1 GENERAL PROVISIONS

‘Trust’ Defined
(a) It is the right to the beneficial enjoyment of
property, the legal title to which is vested in another.
(b) It is a fiduciary relationship concerning property

which obliges the person holding it to deal with the
property for the benefit of
another. The person holding, in view of his equitable title,
is allowed to exercise certain powers belonging to
the owner of the legal title.
Characteristics of a ‘Trust’
(a) It is a fiduciary relationship.
(b) Created by law or by agreement. (Art. 1441, Civil Code).
(c) Where the legal title is held by one, and the equitable
title or beneficial title is held by another.
‘Trust’ Distinguished from ‘Guardianship’ or ‘Executorship’ -

In a trust, the trustee or holder has LEGAL TITLE
to the property; a
guardian, administrator, or executor does not have.
‘Trust’ Distinguished from a ‘Stipulation Pour Autrui’

(a) A trust may exist because of a legal provision or
because of an agreement; a stipulation pour autrui can
arise only in the case of
contracts.
(b) A trust refers to specific property; a stipulation
pour autrui refers to specific property or to other
things.
Co-Ownership as a ‘Trust’ - A co-ownership

is a form of trust, with each co-owner being a
trustee for each of the others.
Art. 1440. A person who establishes a trust is called the

trustor; one in whom confidence is reposed as regards
property for the
benefit of another person is known as the trustee; and
the person for whose benefit the trust has been created
is referred to as the
beneficiary.
BOOK SOURCE: PARAS
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ATTY. BATUNGBAKAL
Parties to a ‘Trust’
(a) trustor or settler — he establishes the trust
(b) trustee — holds the property in trust for the benefit
of another
(c) beneficiary or cestui que trust — the person for whose
benefit the trust has been created
(NOTE: The trustor may at the same time be also the
beneficiary.)
Elements of a ‘Trust’
(a) Parties to the trust
(b) The trust property or the trust estate or the
subject matter of the trust
Art. 1441. Trusts are either express or implied. Express

trusts are created by the intention of the trustor
or of the parties. Implied
trusts come into being by operation of law.
Classification of Trusts
(a) Express trust — created by the parties, or by
the intention of the trustor. (Art. 1441).
(b) Implied trust — created by operation of law
(“trust by operation of law”). [NOTE: There are
two kinds of implied trusts:
1) Resulting trust — (also called bare or passive trust)
— Here, there is an intent to create a trust but
it is not effective as an
express trust.
[Example: Art. 1451, where a person who inherits property
registers the same in another’s name, whom he does not
intend to have any beneficial interest therein for he wants
this for himself.
2) Constructive trust — Here, no intention to create
a trust is present, but a trust is nevertheless
created by law to prevent unjust
enrichment or oppression. [Example: If a person acquires
property by mistake, he is considered by the law as
a trustee while he
holds the same. (Art. 1456, Civil Code).
Art. 1442. The principles of the general law of trusts,

insofar as they are not in conflict with this Code, the
Code of Commerce, the
Rules of Court and special laws are hereby adopted.
Suppletory Effect of the General Law of Trusts -

The principles of the general law of trusts are merely
suppletory. (Art. 1442).
Comment of the Code Commission - This Article incorporates

a large part of the American law on trusts, and
thereby the Philippine legal
system will be am- plified and will be rendered more suited
to a just and equitable solution of many questions.
Anglo-American Precedents - As the law of trust has been

much more frequently applied in the U.S. and in England
than it has in Spain,
such may be drawn freely upon Anglo-American precedents. This is
particularly so, because Anglo-American trusts are
derived from
Roman and Civil Law nations.
Chapter 2: EXPRESS TRUSTS

Art. 1443. No express trusts concerning an immovable or any
interest therein may be proved by parol evidence.
Formalities Re Express Trusts - The law says that “no

express trusts concerning an immovable or any
interest therein may be proved by
parol (oral) evidence.”
Therefore:
(a) the requirement that the express trust be written is only
for enforceability, not for validity between the parties.
Hence, this Article may
by analogy be included under the Statute of Frauds.
(b) By implication, for a trust over personal property an
oral agreement is valid and enforceable between the parties.
(c) Regarding third persons, the trust must be: in a public

instrument and REGISTERED in the Registry of Property, if
it concerns REAL
PROPERTY.
Distinguished from the Formalities of an Implied Trust -

An implied trust (whether real or personal property is
involved) may be
proved by oral evidence. (Art. 1457, Civil Code).
Art. 1444. No particular words are required for the creation of
an express trust, it being sufficient that a trust is
clearly intended.
How an Express Trust Is Created

(a) By conveyance to the trustee by an act inter vivos
or mortis causa (as in a will).
(b) By admission of the trustee that he holds the
property, only as trustee.
[In the case of Geronimo & Isidro v. Nava & Aquino,
L-12111, Jan. 31, 1959, the Supreme Court held that where,
pursuant to a court
decision, the plaintiff not only allowed but even directed the
tenant to pay the rentals to the defendants, and
permitted the latter to
occupy and take possession of the property when the tenant
disoccupied it, such acts should be construed as a
recognition of the fact
that the property, though still in the former’s name, was to
be held in trust for the defendant, to be conveyed to
him on payment of the
purchase price, and such trust is an EXPRESS one.]
Clear Intent - There must be a CLEAR INTENTION to create

a trust. (Thus, no particular or technical words are
required.)
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ATTY. BATUNGBAKAL
Capacity
(a) The trustor must be capacitated to convey property.
[Hence, it has been held that a minor cannot create
an express or conventional
trust of any kind. However, a joint owner of a thing may
be a trustor and the other a trustee of one’s share.
(b) The trustee must be capacitated to hold property and

to enter into contracts.
(c) Thebeneficiarymustbecapacitatedtoreceivegratuitously from the
trustor. (Therefore, if he is incapacitated to be the
trustor’s donee,
heir or legatee, or devisee, he cannot become a
beneficiary of a gratuitous trust.)
Administration of the Trust

(a) The trustee must file a bond. (Sec. 5, Rule 98, Rules
of Court).
(b) The trustee must make an inventory of the real and
personal property in trust. (Sec. 6[a], Rule 98, Rules of
Court).
(c) The trustee must manage and dispose of the estate
and faithfully discharge his trust in relation thereto,
according to law or according
to the terms of the trust instrument as long as they are legal
and possible. (Sec. 6[b], Rules 98, Rules of Court).
(d) The trustee must render a true and clear account.
(Sec. 6[c], Rule 98, Rules of Court).
(e) The trustee cannot acquire the property held in
trust by prescription as long as the trust is admitted.
(If he repudi- ates, and this is
made known to the party involved, prescription is permitted).
[NOTE: In Escobar v. Locsin, 74 Phil. 86, the Court
had occasion to rule that a trust is sacred and
inviolable, and the courts should
therefore shield fiduciary relations against every manner of
chicanery.]
•
QUERY: May a trustee of a trust estate be personally
liable?
•
HELD: In the absence of an express stipulation in a
contract entered into by a trustee for a corporation
that the trust estate and
not the trustee should be liable on the contract, the
trustee is liable in its individual capacity. (Tan
Senguan & Co. v. Phil. Trust Co.,
58 Phil. 700).
•
QUERY: When may a trustee sue as such?
•
HELD: Before a trustee may sue or be sued alone as such,
it is essential that his trust be EXPRESS, that is,
a trust created by the
direct and positive acts of the parties, by some writing,
deed, or will or by proceedings in court. (Philippine Air
Lines, Inc. v. Heald
Lumber Co., L-11479, Aug. 1957).
Art. 1445. No trust shall fail because the trustee appointed

declines the designation, unless the contrary should
appear in the
instrument constituting the trust.
Effect if Trustee Declines - The trust ordinarily

continues even if the trustee declines. Reason — the
court will appoint a new trustee,
unless otherwise provided for in the trust instrument. (Sec. 3,
Rule 98, Rules of Court). A new trustee has to be
appointed, otherwise the
trust will not exist.
[NOTE: As between the mother and the uncle of a minor,
the former ought to be preferred as trustee of the
proceeds of an
insurance policy of the deceased father in the absence
of evidence that would reveal the incompetence of the
mother.
Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless,

if the trust imposes no onerous condition upon the
beneficiary,
his acceptance shall be presumed, if there is no proof to the
contrary.
Necessity of Acceptance by the Beneficiary - For the trust

to be effective, the beneficiary must accept:
(a) expressly,
(b) or impliedly,
(c) or presumably.
When Acceptance Is Presumed - If the granting of

benefit is PURELY GRATUITOUS (no onerous condition), the
acceptance by the
beneficiary is presumed.
Exception: If there is proof that he really did NOT accept.
[NOTE: Acceptance by the beneficiary of a gratuitous trust is
NOT subject to the rules for the formalities of donations.
Therefore,
even if real property is involved, acceptance by the beneficiary
need not be in a public instrument. Here, the court
held that mere
acquiescence in the formation of the trust, and acceptance
under the second paragraph of Art. 1311 (regarding a
stipulation pour
autrui) are sufficient.]
How Express Trusts Are ENDED

(a) Mutual agreement by all the parties
(b) Expiration of the term
(c) Fulfillment of the resolutory condition
(d) Rescission or annulment (as in other contracts)
(e) Loss of subject matter of the trust (physical loss or
legal impossibility)
(f) Order of the court (as when the purpose of the trust is
being frustrated)
(g) Merger
(h) Accomplishment of the purpose of the trust
[NOTE: A testamentary trust for the administration and
eventual sale of certain properties of the testator ends
not at the time the
trustee’s petition for the sale of the property is approved
by the court, but at the time said sale is actually
made and the proceeds
thereof distributed to the proper recipients.
BOOK SOURCE: PARAS
AKD NOTES| PAGE 66

ATTY. BATUNGBAKAL
Chapter 3 IMPLIED TRUSTS
Comment of the Code Commission - The doctrine of

implied trust is founded on equity. The principle is
applied in the American legal
system to numerous cases where an injustice would result if
the legal estate or title were to prevail over the
equitable right of the
beneficiary. Even though there has been no fraud or immorality
involved, still there is a mutual antagonism between the
trustee and the
beneficiary. Fair dealing demands the establishment of the
relation.
Art. 1447. The enumeration of the following cases of implied trust

does not exclude others established by the general law
of trust,
but the limitation laid down in article 1442 shall be applicable.
Enumeration of Instances of Implied Trust - The enumeration is

not exclusive. But trusts are recognized only if not in
conflict with:
(a) the Civil Code,
(b) the Code of Commerce,
(c) the Rules of Court,
(d) Special Laws.
Art. 1448. There is an implied trust when property is sold, and

the legal estate is granted to one party but the price
is paid by
another for the purpose of having the beneficial interest
of the property. The former is the trustee, while the
latter is the beneficiary.
However, if the person to whom the title is conveyed is
a child, legitimate or illegitimate, of the one paying
the price of the sale, no
trust is implied by law, it being disputably presumed that there
is a gift in favor of the child.
Purchase of Property Where Title Is Not Given to Payer but to

Another
(a) This is a resulting trust (because a trust is
intended).
(b) Reason: One who pays for something usually does so
for his own benefit.
(c) Example of the Article: A buys a piece of land
from B. A pays the price so that he (A) may have the
beneficial interest in the land BUT the
legal title is given to C. C is the trustee and A is
the beneficiary.
Suppose in the preceding example C was the legitimate or
illegitimate child of A, is an implied trust still
presumed in this case?
ANS.: No. Here, no trust is implied by law, it being disputably
presumed that there is a gift in favor of the child.
(1st sentence, Art. 1448).
[NOTE: It would seem that inasmuch as a presumption (re the
existence of a donation) has been made by law, the
formalities of a donation
(indicated in Arts. 748 and 749 of the Civil Code) are NOT
REQUIRED, for if the formalities are to be still complied
with, there would be no
need for the presumption.]
Rule if Document Expresses a Different Intent - There

is no implied trust if the document expresses a
different intention.
Example: A paid the money for the purchase of land, but
title was given to B. It was proved that A paid
because A was lending the amount
to B.
Art. 1449. There is also an implied trust when a donation is

made to a person but it appears that although the
legal estate is
transmitted to the donee, he nevertheless is either to
have no beneficial interest or only a part thereof.
When Donee Does Not Get Full Ownership of Benefit - This

is again a “resulting trust,” where the “donee” becomes
the trustee of the
real beneficiary.
Example: A donated land to B. But it was agreed
that B is supposed to have only one-third of the
products of said land. There is a trust here,
with B as the trustee.
Art. 1450. If the price of a sale of property is loaned

or paid by one person for the benefit of another
and the conveyance is made to
the lender or payor to secure the payment of the debt,
a trust arises by operation of law in favor of the
person to whom the money is
loaned or for whom it is paid. The latter may redeem
the property and compel a conveyance thereof to him.
Conveyance of Property so That It May Serve as Security

(a) This is a “constructive trust,” the reason of the
law being to prevent unjust enrichment.
Example: Jose wants to buy a piece of land from Pedro,
but Jose has no money. So Jose asks Carlos to pay
for the land. The land is then
given in Carlos’ name. This is supposed to be Carlos’
security until the debt of Jose is paid. Here an implied
trust has been created. Carlos is
only a trustee, the beneficiary being Jose. When Jose has the money,
he may redeem the property from Carlos and compel
a conveyance
thereof to him (Jose). The trust here is implied, hence it
exists even if in the title taken by Carlos, there is
no mention of the interest of Jose
or of his right to redeem.
(NOTE: Do not confuse the above example with the case; Jose
borrows money from Carlos, and Jose later buys land in his
own
name. Jose then executes a mortgage on the land in favor of
Carlos. This is NOT an implied trust. It is
clearly a case of
MORTGAGE.)
(b) No fiduciary relationship exists between the so-called
“trustor” and the so-called “trustee” in a constructive
trust.
Trust Receipt - In connection with Art. 1450, mention may

be made of what was referred to in Phil. Nat. Bank v.
Vda. y Hijos de Angel
Jose, 63 Phil. 814, as a “trust receipt.” The Court said: “A
trust receipt, as a contract, partakes of the nature
of a conditional sale the importer
becoming the absolute owner of the imported merchandise as soon
as he has paid its price; until the owner or the person
who advanced
BOOK SOURCE: PARAS
AKD NOTES| PAGE 67

ATTY. BATUNGBAKAL
payment has been paid in full, or if the merchandise has

already been sold, the proceeds turned over to him, the
ownership continues to be
vested in such person.”
‘Trust Receipt’ Defined - A trust receipt is a

security transaction intended to aid in financing importers
and retail dealers who do not
have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to
acquire credit
except thru utilization, as collateral, of the merchandise
imported or purchased.
Default or Failure of Entrustee to Comply with Terms of

Trust Agreement: Cancellation of Trust Not Absolutely Necessary
In the event of default by the entrustee on his obligations
under a trust receipt agreement, it is not absolutely
necessary that the entruster
cancel the trust and take possession of the goods to be able
to enforce his rights thereunder.
Significantly the law (PD 115) uses the word “may” in granting
to the entruster the right to cancel the trust and take
possession of the
goods. Consequently, petitioner has the discretion to avail
of such right or seek any alternative action, such as a
third party claim or a
separate civil actions which it deems best to protect its right,
at any time upon default or failure of the entrustee
to comply with any of the
terms and conditions of the trust agreement.
Art. 1451. When land passes by succession to any person and

he causes the legal title to be put in the name of
another, a trust is
established by implication of law for the benefit of the true
owner.
When Title to Inherited Land Is Not in Owner’s Name

(a) This is a “resulting trust,” for a trust is
intended.
Example: A inherited a piece of land from his father, but
A caused the legal title to be put in the name of
X, a brother. Here a trust is
impliedly established, with X as trustee and A as the
beneficiary.
Rule in Co-Ownership - If a co-owner or co-heir

possesses certain property owned in common by him and
others, he is under the same
situation as a trustee insofar as the shares of the
other co-owners are concerned.
Paraphernal Properties Registered Under the Husband’s Name - If

properties inherited by a wife are registered under the
husband’s
name, she can claim them as her own upon his death even if she
does not refer to the situation as a trust.
Reason: Here clearly a trust was intended. In Severino v.
Severino, 44 Phil. 343, it was clearly ruled that the
registration of property in the
name of one who holds in a trust character does not extinguish
the trust or destroy the rights of the beneficiary.
Title in the Name of the Surviving Husband - In Flores

v. Flores, 48 Phil. 288, it was held that “as long as
the surviving husband retains
the property of the conjugal estate itself, or its place,
if sold, he holds it in the character of administrator
and is virtually a trustee (except
with reference to his share) for those interested in the
conjugal partnership. Nor does the obtaining of a
Torrens Title in any way change
the situation.”
Right of Co-heirs - In Castro v. Castro, 57 Phil.

675, the Supreme Court observed that: “One who acquires a
Torrens Title in his own name
to property which he is administering for himself and his
brother and sisters as heirs from a common ancestor,
and in common descent,
may be compelled to surrender to each of his co-heirs his
appropriate share; and a proceeding for partition is an
appropriate remedy by
which to enforce this right.”
Art. 1452. If two or more persons agree to purchase property

and by common consent the legal title is taken in the
name of one of
them for the benefit of all, a trust is created by force
of law in favor of the others in proportion to the
interest of each.
When Property Is in the Name of Only One of the Co-Buyers

- This is a resulting trust in view of the intent
to create a trust.
Presumption That Shares Are Equal - The shares or

interest of co-owners are presumed to be equal. (Art.
485, 2nd par., Civil Code).
Art. 1453. When property is conveyed to a person in

reliance upon his declared intention to hold it for, or
transfer it to another or
the grantor, there is an implied trust in favor of the person
whose benefit is contemplated.
When a Person Declares His Intent to Hold Property for

Someone Else
(a) This is a “resulting trust” in view of the
owner’s intention to create a trust.
Example: Jose bought from Pedro a parcel of land and it
was conveyed to him (Jose) on Jose’s statement or
declaration that he
would hold it in behalf of Carlos. Here, Jose is merely
the trustee, while Carlos is the beneficiary.
(b) Suppose in the preceding example Jose asserts that
he is really the owner, would he be allowed to
do this? ANS.: No, for he would be in
estoppel. (See Art. 1431, Civil Code).
(c) If a person promises to temporarily hold property
and administer the same 'til it be freed from all debts and
en- cumbrances, he is a
mere trustee and must later on return the property.
Art. 1454. If an absolute conveyance of property is made in

order to secure the performance of an obligation of the
grantor toward
the grantee, a trust by virtue of law is established.
If the fulfillment of the obligation is offered by the
grantor when it becomes due,
he may demand the reconveyance of the property to him.
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ATTY. BATUNGBAKAL
Absolute Conveyance Made for Security Purpose

(a) This is a “constructive trust,” the purpose of
the law being to prevent unjust enrichment to the
prejudice of the true owner.
Example: Marlene was indebted to Susan. For the sole
purpose of guaranteeing her debt, Marlene sold her parcel
of land to Susan.
Here, a trust has been created. If Marlene pays her debt when
it becomes due, Marlene may demand the resale of
the property to her.
Art. 1455. When any trustee, guardian or other person holding

a fiduciary relationship uses trust funds for the purchase
of
property and causes the conveyance to be made to him or
to a third person, a trust is established by operation
of law in favor of the
person to whom the funds belong.
Use of Trust Funds This is a “constructive trust”

because again, the purpose is to prevent unjust
enrichment.
Applicability of Article The Article applies to:

(a) any trustee
(b) guardian
(c) or other person holding a fiduciary relationship
(Art. 1455) (like an agent; therefore the acquisitions of
the agent inure to the benefit of
his principal)
Example - An agent using his principal’s money purchases land in

his own name. He also registers it under his name. Here, he
will be
considered only a trustee, and the principal is the beneficiary.
The principal can bring an action for conveyance of the
property to himself,
so long as the rights of innocent third persons are not
adversely affected.
Reasons for the Rule

(a) fiduciary or trust relations
(b) estoppel
(c) to remove the temptation to place self-interest above
all other things, and at the expense of one’s integrity
and duty to another.
Art. 1456. If property is acquired through mistake or fraud,

the person obtaining it is, by force of law, considered
a trustee of an
implied trust for the benefit of the person from whom the
property comes.
Property Acquired Thru Mistake or Fraud

(a) This is another example of a constructive trust.
Example: Bella was given a car by Mina although it should
have been given to Erlinda. Bella is considered as merely
the trustee of the
car for the benefit of Erlinda.
Nature of the Mistake or Fraud

(a) The mistake referred to in Art. 1456 is a
mistake made by a third person, not that made by a
party to the contract. For if made by a
party, no trust is created.
(b) Similarly, the fraud referred to in Art. 1456 is extra-
contractual fraud and the effects are
- Art. 1456 does not apply to a donation of property which
the donee has acquired thru a legal donation, even if she
breaks an
important condition thereof. Thus, even with the breach condi-
tion, she does not become a trustee. It is still hers,
subject to an action
for revocation. If the action to revoke has prescribed, the
property cannot be taken away from her. If prescription
runs even in a case
of an implied trust, prescription certainly runs with
greater reason in a case like this, where as we have
seen, no trust ever existed or
was created.
Query — Do Trusts Prescribe?

(a) Express trusts do NOT prescribe as long as they
have not been repudiated.
How ‘Creative Trusts’ Are Created - This is by way

of equity to prevent unjust enrichment, arising
against one who, by fraud, duress or
abuse of confidence, obtains or holds the legal right to property
which he ought not, in equity and good conscience, to hold.
Art. 1457. An implied trust may be proved by oral evidence.
Proof of Implied Trust

(a) This Article applies whether the property is real
or personal.
(b) The rule in Art. 1457 is different from that enunciated
in Art. 1443 which states that “no express trust concerning
an immovable or any
interest therein may be proved by parol evidence.”
Oral Evidence for Trust Must Be Trustworthy - While an

implied trust may be proved by oral evidence, still,
said evidence must be a
trustworthy oral evidence, for oral evidence may be easily
fabricated.
BOOK SOURCE: PARAS
AKD NOTES| PAGE 69

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PAT – SBCA SOL 2ND SEM SY 2015-2016

Partnership’ Defined - It is a contract whereby two

Characteristics of the Contract

(a) The contract is consensual, because it is perfected by

(b) There must be a contribution of money, property or

(a) HOW CREATED

(b) HOW LONG IT EXISTS

(e) ABILITYTO BIND

(a) VOLUNTARY agreement of

(a) created by the state in the form of

(b) not more than 50 years; (Sec. 11,

(c) liable only for payment of their

(c) may be liable with their private

(d) even if a partner transfers his

(d) a transfer of interest makes the

(e) generally, the stockholders cannot

BOOK SOURCE: PARAS

AKD NOTES| PAGE 1

(e) generally, partners acting on

(f) a partner can sue a partner who

(g) a partnership is a national of the

(h) the firm becomes a juridical

(f) A stockholder cannot sue a

(g) a corporation is a national of the

(h) the firm be- comes a juridical

‘Ordinary Partnership’ Distinguished from the ‘Conjugal Partnership

upon the celebration of the

object, length of existence, etc.; the

law is only subsidiary

personality distinct from that of

the husband or wife; hence, it

(d) begins from the moment of the cannot sue or

1784, Civil Code)

the marriage — no contrary

(e) formed for profit

(f) as a rule, profits are divided ac-

proportion to the amount

contributed (Art. 1797, Civil Code)

divided equally (but settlement

(g) as a rule, management is

appointed by the others; other-

wise, all are equally considered

agents of the firm (Art. 1803, Civil

partnership property belong to

BOOK SOURCE: PARAS

AKD NOTES| PAGE 2

even without dis- solution

(h) there are few grounds for

(i) there will be no liquidation

‘Partnership’ Distinguished from ‘Co-ownership’ (Community of

it cannot sue or be sued as such)

necessarily for profit)

representation (although it is enough

for one co-owner to bring an action for

(e) can dispose of his share with- out

(f) must not be for more than 10 years

(although agreement after termination

may be renewed) (hence, if more than

10 years, the excess is VOID)

imposed by the testator or donee of the

proportion- ate shares (any stipulation

(Here, a public instrument is

(i) no public instrument needed even if